The Autumn Statement 2014

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Summary of proposed changes to UK property taxation

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Contents

Part 1 | About AES International 3 Part 2 | About the authors 4 Part 3 | Summary of proposed changes: 5 1. Changes to UK property Stamp Duty 5 2. UK Capital Gains Tax on property for non-residents 6 3. UK Income Tax and personal allowances for non-residents 7 Part 4 | UK Residential property tax exposure 8 Part 5 | Ways to hold UK residential property 9 Part 6 | Potential UK residential property solutions: 10 1. Banking and lending 10 2. Offshore trust and offshore company 10 3. Insurance 11 Part 7 | Resources and articles 12

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About AES International

AES International offers independent financial advice, offshore banking, investment management, tax planning and insurance services to private clients in 36 countries across Europe and the Middle East. We have won in excess of 25 financial awards including Best Global Offshore Banking Team of 2014, Best Private Wealth Manager Adviser in the United Arab Emirates of 2014 and Best International Financial Planning Firm of 2013. AES International also won The Sunday Times Virgin Fast Track 100 Best Management Team award for 2012, as well as being the fastest growing financial services organisation for two years running, which is a testament to the trust our clients put in our financial planning services to help them achieve their goals.

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About the authors

Carlton serves High Net Worth and Ultra High Net Worth private clients for AES International across the Middle East, providing them with independent financial planning advice that covers their offshore structuring, tax planning and investment management needs.

Previously, he was with Barclays Private Bank in London and Dubai advising clients with assets of £5m to £1 billion on how to protect, grow and plan their wealth. Before joining Barclays, Carlton worked at Grant Thornton, a leading UK accounting and tax advisory practice where he advised families and entrepreneurs on their wealth typically created through the sale of their businesses to global companies including Google, Red Bull Formula 1 and Blackrock Asset Management. His diverse clients have included Premier League football players, PGA Tour golf players, international pop music stars, TV and media companies.

Carlton Crabbe, Partner

Nick Michaels, Senior Banking Executive

Nick is an experienced Private Banking professional with a passion for excellence and a desire to provide holistic financial solutions for Private Clients.

An expert in private banking and wealth management for expatriates, the value he brings to clients is his ability to understand them, develop strong relationships and provide suitable solutions either personally or through his network of specialists. Before joining AES International, Nick lead the desk for the private banking team at Coutts in London, where he was responsible for offering a tailored and personalised banking service for Private Clients.

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UK Property SDLT: Previous Bands Tax Rates

Up to £125,000 Zero

Over £125,000 to £250,000 1%

Over £250,000 to £500,000 3%

Over £500,000 to £1 million 4%

Over £1 million to £2 million 5%

Over £2 million 7%

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Summary of proposed changes

1. Changes to UK property Stamp Duty Buying a UK Property has become cheaper for most people with the changes announced in the UK Government’s Autumn Statement. The headline grabbing reform to UK Property's Stamp Duty (SDLT) was a popular move by the Chancellor and brings the UK into line with Scotland's system of tax on property, an increasing tax rather than a slab tax based on rigid property price bands.

As a guide, those buying a UK property for less than £937,500 will see a reduction in their stamp duty tax bill. But those buying over this level will see an increase, when compared with the old stamp duty rates:

UK Property SDLT: New Bands Tax Rates

Up to £125,000 Zero

Between £125,000 to £250,000 2%

Between £250,000 to £925,000 5%

Between £925,000 to £1,500,000 10%

Over £1,500,000 12%

Under the old system, stamp duty for UK residential property became payable based on a percentage of the whole value depending upon which band the property fell into. Under the new system, tax will be payable for the portion of the price within each band. The new UK property stamp duty rates are as follows:

For most UK home buyers, these changes to stamp duty will mean a lower level of tax payable when buying a property. For others, the charge is much greater.

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2. UK Capital Gains Tax on property for non-residents The government initially warned UK non-residents in 2013 about its intention to tax the profits they made when they sold their UK property. Now, it has been confirmed. From 6th April 2015, all gains on property will be subject to 18% or 28% Capital Gains Tax (CGT) when the property is held personally. Some non-residents already pay CGT because of the annual tax on enveloped dwellings (ATED) rule.

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Summary of proposed changes (cont.)

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3. UK Income Tax and personal allowances for non-residents There was good news for non-residents though, as the Government decided not to implement its proposed changes to the personal allowance for non-residents. The changes that it was consulting on, would have meant individuals losing their income tax-free personal allowance for 2015/2016. If the proposals had gone ahead, the loss of the personal allowance (£10,600), would have meant an additional tax bill of £4,240 per person, each year on their income.

The UK government still believes there is a strong rationale for removing the personal allowance for non-residents, but says it will carry out a more detailed consultation. There will be no changes before April 2017 which will be a welcome relief to non-residents, who faced losing both there personal allowances, as well as their favourable tax free capital gains regime from 2015. Non-residents will still need to consider the impact of the new Capital Gains Tax charges in the investment returns they anticipate to receive from investing into UK residential property. It may be the Stamp Duty Land Tax changes that have the biggest impact (and could lead to investors opting for several smaller properties, rather than one or two large ones) and which are adversely affected by the changes announced in SDLT rates in the Autumn Statement.

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Summary of proposed changes (cont.)

After Stamp Duty Land Tax (SDLT) has been considered, UK property assets are currently exposed to 3 types of UK tax.

UK residential property tax exposure

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Income Tax Owners of rented properties will be subject to income tax at the top rate of 45% once their UK sourced income reaches £150,000 per annum. The lower tax threshold rates for 2015 are 40% and 20% after the personal allowance is removed from April 5th 2015. Capital Gains Tax All capital growth in property is subject to either 18% or 28% upon sale (other than principle private residence relief).

UK Inheritance Tax Applicable to all UK situated assets at 40% unless appropriate tax structuring is put in place. For example, £10m of UK property held in a personal name would be subjected to £4m of UK Inheritance Tax upon the passing of the owner.

Ways to hold UK residential property There are typically three ways to purchase UK residential property: 1. Directly in own name; 2. Non-UK resident trustee; and 3. Non-UK resident company.

The table below summarises some of the key considerations for investors in UK property when deciding which ownership route may be appropriate to purchase their UK residential property in. Personal ownership Non-resident

trustees Non-resident company

Confidentiality No Yes Yes

Succession planning

No Yes Yes

SDLT on purchase of property

Up to 12% Up to 12% Up to 15%

ATED No No Yes

CGT None currently if non-UK resident. Applicable from 6th April 2015.

None currently if non-UK trustee. Applicable from 6th April 2015.

Yes, 28% tax accruing on gains post 6th April 2013.

IHT Up to 40% on death. Up to 40% on death of settlor and potential lifetime IHT charges.

No (provided shareholder retains non-domiciled/non deemed domiciled status).

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Potential UK residential property solutions

Individuals purchasing UK residential property have a number of solutions open to them in order to mitigate, defer or remove the 3 UK taxes that apply. With interest rates currently in the UK at 300 year lows, holding debt, commonly known as a mortgage, against property has proved very popular since the financial crisis began. Debt can also be used to create a more efficient income from the property because when structured correctly, income tax can be offset against the cost of borrowing. In certain circumstances, any debt outstanding against a UK property upon an individuals passing may also be deductible for UK Inheritance Tax, making debt potentially an efficient way to hold UK property for non-UK domciles. Tax advice must be taken in this respect. For high net worth individuals, offshore private banks will also arrange bespoke lending solutions, for example, against portfolios of investments, as well as property. The advantage of this route is that borrowing costs can be cheaper and higher amounts of borrowing achieved.

Banking and lending

Offshore trust and offshore company

For many years, UK properties have been held by non domiciled individuals in offshore companies or Special Purpose Vehicles (SPVs) to protect from UK Inheritance Tax and also to add a layer of privacy. More recent legislation has meant that holding UK property like this has become much less attractive, although many non-domiciles still use this route despite the potentially higher stamp duty costs in certain circumstances. Offshore Trusts have often been used for succession planning in families and continue to remain an attractive structure to hold UK residential property. They offer a high level of control allowing a family to pass assets down to the next generation in a timely and controlled manner. Both Offshore Trusts and Offshore Companies can use debt to help structure their assets in a tax-efficient manner.

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Potential UK residential property solutions

Insurance

If a property is held in a personal name, it is typically exposed to UK Inheritance Tax, which is charged at 40% of the value of the property at the date of the passing of the individual. Allowances including the nil rate band of £325,000 per individual are available to reduce this tax. As the complexity and the tax cost of structuring property has increased in recent years, because of the changes in UK tax law affecting both domiciled and non-domiciled individuals, many are using high value insurance policies in order to provide a high amount of cash liquidity upon their passing, to be made available to the beneficiaries of the UK property (or other UK situs assets) so that the UK Inheritance Tax can be paid. When structured correctly, insurance policies can prove very effective in paying the UK Inheritance Tax due and speeding up the process of probate so that the property can be released from probate.

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Resources and articles

HMRC calculator for the revised Stamp Duty Land Tax bandings to help you work out the cost of purchasing UK residential property. If you want to open an offshore bank account and enjoy the benefits of private banking, including mortgages, you can download our free e-book “The Expat Guide to Offshore Banking”. And finally…… do you want to know the cost of living in London?

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