UK commercial property investment can be highly attractive for overseas investors. A favourable tax regime includes no capital gains tax and several notable deductions, which can enhance after-tax returns.

Typical structure used by non-residents to invest in UK commercial property

Non-resident investor

Interest

Rent

Taxation of rental income A non-UK resident special purpose vehicle (SPV) investing in UK commercial property will be taxed at the income tax rate of 20 per cent on net rental income received from that investment. This tax rate compares favourably with the rate of UK corporation tax, which will stand at 20 percent.Investors can typically receive rental income gross by registering under the non-residents’ landlord scheme. This therefore eliminates any UK withholding tax obligations on the rental income the SPV will receive.

Tax deductions In calculating the SPV’s taxable income, the SPV will get a deduction for expenses

wholly and exclusively incurred for the purposes of the property rental business it carries on.This will include a deduction for any arm’s-length interest payments on borrowing taken out to acquire the property.In this instance, the SPV should be entitled to an allowable deduction on its bank borrowings as well as internal borrowings from its non-UK resident investor (or associated entities). When structured properly, the interest payable on internal debt will not be subject to UK withholding tax.The UK does not have specific thin capitalisation limits for this type of investment. As a result, high levels of leverage and therefore interest deductions have typically been available. However, care should be taken to ensure that the internal loan made to the SPV is on arm’s-length terms to ensure deductions are available.In addition, tax depreciation in the form of capital allowances will generally be available as a deduction from the SPV’s taxable income in respect of the plant and machinery at the UK property.

Capital gains A non-UK resident is not subject to capital gains tax in the UK on commercial property. Therefore by holding UK property through a non-UK resident SPV, any gain realised on a disposal of the property will not be subject to capital gains tax.It should be noted that whilst a non-resident is not subject to UK capital gains tax, it is subject to UK tax on profits of a trade carried on in the UK. It is therefore important to ensure that any property is held as an investment asset and not as trading stock, or as part of a UK trade.

VAT The letting of commercial property in the UK is generally exempt from VAT. However, it is possible to opt to tax the property and charge VAT on rental income. This generally enables a property owner to recover any VAT that it incurs. This should ultimately place a property owner in a VAT-neutral position. Specific advice should be taken before making such an election.The VAT treatment on the acquisition of a property can typically be structured as a transfer of a going concern, but care is required here.

SDLT The acquisition of property in the UK is subject to stamp duty land tax (SDLT) at a rate of four per cent for most commercial properties. In some circumstances, it may be possible to avoid paying SDLT through careful structuring, but this will depend on the exact circumstances. Going forward, an efficient exit could involve the sale of the SPV instead of the property to avoid an SDLT charge.

CONTACT US:

If you would like further information or advice, please contact your local PKF Francis Clark office:

Exeter: 01392 667000New Forest: 01425 610166Poole: 01202 663600Plymouth: 01752 301010Salisbury: 01722 337661Taunton: 01823 275925Torquay: 01803 320100Truro: 01872 276477

http://www.pkf-francisclark.co.uk/international/

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UKPROPERTY

Interestanddividends

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Loan

NON-UK SPV

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Non-residents investing in UK commercial property

Francis Clark Tax Consultancy Limited.

Registered Office:Sigma House, Oak View Close, Edginswell Park, Torquay TQ2 7FF.

Registered in England No. 04993822

Francis Clark has eight offices in the South West: Exeter, New Forest, Plymouth, Poole, Salisbury, Taunton, Torquay and Truro. Please visit www.fctc.co.uk for contact details of your nearest office.

For further advice, please contact us:

Francis Clark Tax Consultancy Limited, Sigma House, Oak View Close, Edginswell Park, Torquay, Devon, TQ2 7FF. Tel: 01803 320100