25th February 2025Tax Considerations for Overseas Investors in UK Property

The UK remains an attractive place for overseas investors wishing to invest in property. However, foreign investors and developers must consider key tax implications before proceeding. Below is a high-level overview of the key tax considerations for overseas property investors in the UK. In addition to the information below, investors should also seek tax advice in their own jurisdictions.

This is a fast-moving area of tax; information is correct as of 1 February 2025.

Income tax

• For individual investors, net rental income from UK property is subject to income tax at a rate of up to 45%.
• In the case of investment by companies, corporation tax is payable at a rate of up to 25%.
• Overseas companies and individuals must register with HMRC and file annual tax returns to declare net rental income.
• In some cases, letting agents may be required to withhold 20% of income tax from rental income and then pay tax directly to HMRC on behalf of non-UK resident landlords. This is the case if HMRC do not give permission to pay rental income gross.

Capital gains tax

• Capital gains tax is charged on the disposal of UK properties (residential and commercial). Individuals will pay capital gains tax at a rate of up to 24%. Companies pay corporation tax on capital gains at their prevailing corporation tax rate.

• Indirect disposals are also subject to capital gains tax or corporation tax. An ‘indirect disposal’ is, typically, the disposal of shares where at least 75% of their value comes from UK property.
• In the case of non-UK individuals, any direct or indirect disposals (including gifts) of UK property must be reported to HMRC, and the tax paid, within 60 days of completion. Companies are subject to standard corporation tax reporting deadlines.

Inheritance tax

• UK residential property is within the scope of UK inheritance tax. Inheritance tax is charged at 40% of the value of the property (after a £325,000 nil-rate band). In addition, debts where the borrower has used the funds to purchase UK residential property, are also subject to inheritance tax.
• If left to a spouse, property is generally free of inheritance tax.
• If the residential property is held by a company, the value of shares in the company are within the scope of inheritance tax, but only to the proportion of value derived from UK residential property.

VAT

• Commercial property landlords may opt to tax the property, allowing them to reclaim VAT on expenses but requiring them to charge VAT on rent and sales. Most commercial property in UK is opted to VAT, which means a purchaser will need to opt to VAT to recover VAT charged. (Note: The option to VAT is made by the current landlord, it does not bind any new purchasers who need to opt in their own right).
• Residential property is exempt from VAT and no VAT can be recovered on builder’s fees and other supplies incurred in connection with residential property (or commercial property where the property has not been opted to tax).

Stamp Duty Land Tax

• Stamp taxes are payable on the purchase of land and property in the UK. The precise rate depends on whether the property is commercial, residential or mixed-use; whether the buyer is a company; whether it is a second home by an individual; whether the purchaser is non-UK resident (in which case surcharges apply); and where in the UK the property is being purchased.

Current rates, for England, excluding all surcharges other than the non-resident surcharge, are as follows (note: Rates change frequently with little notice). Please note that the rates in Wales and Scotland differ.

Residential property

Band                                      England[1]                                                             

£0-£125,000                        2%

£124,001 – £250,000        4%

£250,001 – £925,000        7%

£925,001 – £1.5m             12%

£1.5m +                                14%

Commercial property

Band                     

£0 to £150,000                   0%

£150,001 – £250,000        2%

£250,001 +                          5%

Funding

• Individuals are free to fund the purchase of the property as they wish, but tax treatment of interest varies:
• In the case of residential property held by an individual, interest relief is given as a tax reducer, at 20% of the interest charge (or the lower of net rental income or overall income).
• Interest deductibility can be restricted under basic transfer pricing rules, or on the basis that the payment is not ‘wholly and exclusively’ for business purposes. It is not possible to reduce UK tax by excessive interest payments to overseas lenders.
• UK withholding tax (20%) may apply to interest payments to non-UK lenders, unless a double tax treaty reduces or removes this requirement.
• Corporate interest restrictions may impact the permitted interest deduction by companies.

Further information can be found at https://hwfisher.co.uk/app/uploads/2024/04/Residential-Tax-Guide-November-2024-V1_Digital.pdf

The information in this article is for general guidance only and does not constitute professional advice. Specialist advice should be sought about your specific circumstances.

Please contact Jamie Morrison (jmorrison@hwfisher.co.uk) or Trusha Shah (tshah@hwfisher.co.uk) for more information.

[1] From 1 March 2025