Overseas buyers need to board the raft of legislation

The weakness of sterling has given more incentive for euro zone buyers to look seriously at the UK commercial property market – but where do they begin when it comes to meeting the raft of UK tax legislation?

The right vehicle
The first decision when making a journey overseas is to choose ones mode of transport – the flight, the train ticket, the tunnel or the ferry. The choice of vehicle is just as important when embarking on a UK property purchase.

To some extent the decision will be driven by the circumstances of the investor – is it a wealthy individual, a family trust, a small consortium of associates or is it a fully marketed collective investment. We are assuming that the investor is a foreign domicile but it also important to understand the tax residence status of investors.

UK property can be held in so many ways; by individuals, partnerships, limited liability partnerships, a limited company, a trust, a Real Estate Investment Trust (REIT) or a host of offshore variations. It would be nice to be able to say that there was a general rule of thumb, but each circumstance has to be looked at and advised upon individually as no two circumstances are identical.

The important thing is to plan ahead and look at which vehicle is right for the circumstances and then, if appropriate, register at Companies House.

Registration with the Centre for Non Residents
Rental income from any UK situated property must be declared to the UK tax authorities so all non resident landlords need to register at the CNR under HMRC’s non-residents landlords scheme (NRLS). Simply, this notifies the Inland Revenue who will be responsible for reporting the income from the property and who will be liable for any tax in respect of that income.

Failure of an investor to register under the NRLS means that UK tax will be deducted from the rental income at source by the letting agent. The UK agent is obliged to deduct tax at 20 percent of the gross rental income (before any deductions for interest and managing expenses), a severe penalty for most landlords.

In the absence of a UK registered agent, the obligation to deduct tax at source falls to the tenant.

Registration for VAT
VAT in property is a highly complex area and a minefield for the unwary. In essence an election has to be made by the original owner of a commercial property to opt to tax the building.

A developer will naturally wish to opt for a building to be taxed as this will allow the VAT on the building costs to be reclaimed however if it is taxed the subsequent sale of the property and the rental income streams will also be subject to VAT. For many business occupiers this will be a recoverable tax against the VAT charged on their income but for those businesses that have no vatable sales (such as many banks and financial services companies) VAT is an additional expense.

More importantly a foreign property buyer needs to register for VAT if acquiring a VAT opted property so that upon purchase the property can be transferred as a going concern, thus avoiding the need for the buyer to raise cash to meet the VAT liability upon acquisition.

Gearing and transfer pricing
Despite the current parlous state of many lending institutions, most acquisitions will have a degree of borrowing within the mix of funding for the purchase. The interest payable on the borrowing is normally a tax deductible expense against the rental income.

Where foreign buyers use other collateral for the loans, or where the loan to value (LTV) is higher than may normally be expected from a current market transaction with a UK lending institution, HMRC can restrict the amount of interest allowed as a deduction under the transfer pricing legislation.

This is going to be an important area in which overseas buyers need to be aware, particularly with lower commercial LTV percentages that many UK lenders are now insisting upon.

The right advisor
This article has touched on one or two important issues – but what is important in the mix is the appointment of a competent advisor.

For more information, contact Paul Windsor of WSM Property on 020 8545 7606 or email paul.windsor@wsm.co.uk
or visit wsmproperty.com