Meg Saksida considers the tax issues to consider in the ownership of a UK family home.
Non-UK domiciled expats from other countries are often invited to come to the UK to bring unique skills and expertise, novel ideas and investment. When a non-UK domiciled individual arrives in the UK, they will need somewhere to live, but having a home or accommodation in the UK means they will need to consider their exposure to UK tax.
In the past, there were several tax advantages available to a resident, non-UK domiciled individual (RND) purchasing UK property, but recent anti-avoidance legislation has ended most of these advantages, so a non-UK domiciled individual’s purchase of a UK property needs to be well thought out.
Statutory residence test
The first thing to consider is the impact of having a home in the UK on the residence position of the non-UK domiciled individual.
The use of a UK property, whether it be owned or let, may impact their residence under the ‘automatic UK residence test’ or the ‘accommodation test’ within the ‘sufficient ties test’. The automatic UK test requires there to be a 91-day period in which the individual has a UK home. This period only requires 30 of the 91 days to be in the tax year in question. There are two questions to ask. Firstly, if the individual has such a 91-day period (in which they have a UK home); and secondly, whether they have spent at least 30 days in that home in the tax year. If they answer ‘yes’ to these two questions, they will be automatically UK resident if they do not have an overseas home during that 91-day period. If they do have an overseas home during that 91-day period, they will be automatically UK resident if they spend less than 30 days in it during the tax year.
If the individual is considering the sufficient ties test rather than the automatic UK test, the ‘home’ definition is far less formal than a ‘home’ in the automatic UK test and can be much wider, including accommodation such as the home of a friend, a holiday home, or the home of a family member. Only one night needs to be spent in the property during a consecutive 91-day availability period (16 if it is the home of a relative) for the property to be classified as a ‘tie’. As such, if the individual does have a family home in the UK, this is almost certain to give the individual another sufficient tie.
Impact of the initial purchase on the RND’s taxability
The non-UK domiciled individual moving to the UK will also need to consider when and from where the funds will arrive in the UK to finance the home if they wish to purchase it.
If they buy the home before they arrive in the UK or shortly afterwards, they are likely to be able to pay for the home using ‘clean capital’. This is money that has been taxed already outside the UK in a period where the RND was not liable to UK tax on their worldwide income, and as such, it is not taxed again in the UK. If the property is bought in later years from overseas funds, this will be classed as a ‘remittance’. It will depend on the level of income and gains that have arisen since the RND has arrived in the UK and the basis of taxation the RND has decided to be taxed under, as to how this capital will be taxed.
For example, an RND sending over capital from a mixed fund containing clean capital and other sources of income or gains will be obliged to consider the receipt of the funds in a specific order; one not to the taxpayer’s benefit.
Loans and IHT
Often, RNDs consider taking out loans to finance the property. For a UK domiciled individual, the taking out of a loan would not affect the inheritance tax (IHT) payable on their estate. The loan would be offset against the asset and the estate would not rise or fall when a family home was purchased. Likewise, if a loan was not used (e.g. if the purchase was made in cash), a cash asset would reduce, and a residential property asset would increase, leading again to the estate being the same.
However, with an RND as non-UK situs assets are excluded property and not chargeable to UK IHT, if the RND uses cash situated abroad to purchase the UK property, they will convert an asset not chargeable to UK IHT into a chargeable asset. Therefore, taking out a loan in the UK to finance the property would make more sense to them.
There are, however, anti-avoidance provisions in place to avoid any mischief surrounding this practice. Because non-UK domiciled, non-resident individuals are not charged IHT on foreign currency bank accounts situated in the UK, common practice was to borrow against a UK property, putting the deposit in such a bank account that was not chargeable to UK IHT. The house would be offset against a loan, giving a nil value to their estate, whereas the cash asset generated by the loan would be in an IHT-free bank account. This practice is no longer allowed.
Capital gains tax and income tax
Although there is no impact on an individual’s income tax by owning a family home directly, the RND will be exposed to UK capital gains tax (CGT) if they sell the property. Any gain made on the sale, however, is likely to be covered by principal private residence relief if the RND sells the property in the UK before they leave. Historically, they could also obtain a capital gains tax (CGT) exemption even if they did not sell it before they left, as prior to April 2015, non-UK residents were not subject to CGT on residential property.
If the RND does wish to retain the property after their secondment or stay in the UK, they may still be able to dispose of the property tax-free, but only if it has continued to qualify as the individual’s main residence. In order to do this, there are conditions which are difficult for non-UK residents to satisfy. These are that the owner or their spouse needs to spend at least 90 midnights in the property every year. Those working full-time abroad will find this almost impossible.
Inheritance tax
As the property will be a UK-situs asset, it will be in the estate of the individual for IHT purposes, irrespective of their residence status.
However, the residence nil rate band (i.e. up to £175,000 for 2021/22) will be available for the taxpayer to use if the property is a qualifying residential interest that is ‘closely inherited’ or left to children, grandchildren and remoter issue and their spouses.
Practical tip
From 1 April 2021, the RND also has to consider the different rates of stamp duty land tax (SDLT) that will apply to purchasers of residential property in England and Northern Ireland by those who are non-UK resident. The SDLT is 2% more than UK residents will pay, so the intended purchaser may wish to wait until they are UK resident to purchase their property.
