Does tax have to be taxing?
It has always been good financial planning to have ones tax affairs in good shape; this minimises the chance of nasty surprises and has never been truer than today, with the Revenue’s focus on their more sophisticated “customers” (their word for taxpayers).
This brief note highlights some typical situations and their tax treatment:
Firstly, two non tax points which we often see causing issues in practice:
It is important to ensure that the legal ownership matches your intentions. For example, with property owned jointly, it will often be advantageous to hold it as ‘tenants in common’ rather than as ‘joint tenants’, as this provides flexibility for planning.
Again, it is important that your will provides a clear and efficient method by which your executors and heirs can deal with your properties. If there are international aspects to your affairs, you would be best advised to check that your solicitor is aware of these ++++
Now three common situations for UK property:
1 Owner occupiers
Here there is usually no Capital Gains Tax (the generous ‘Principal Residence Relief’ takes most properties out of tax) on sale.
There can be income and CGT issues if the property’s ownership is routed via a trust or company. Specialist advice is needed here.
Inheritance tax (IHT) is the biggest long term issue. In the recent past, offshore structure was commonly used but in recent years most owner-occupiers have sought to mitigate IHT by borrowing against the property or by life insurance.
Offshore mortgages used to provide some remittance planning opportunities for ‘non doms’ but their advantages have largely been taken away, albeit with some legacy positions.
2 Investment properties
It is very widely known, that all UK source rental income is subject to UK tax, at a rate of up to 50%, with effect from April 2010. The usual deductions apply. Annual filings are required.
The rules are more generous for Capital Gains Tax which is only charged if the owner lives in the UK (or in the case of a company owner, is resident in the UK).
IHT bites unless the property is owed by an offshore company. For a UK domiciliary, this will not give any advantage but for a ‘non-dom’, this can take the property out of the IHT net altogether.
3 Resident tenants
If you live in the UK and rent property from a foreign landlord, you need to carry out a quick check of the arrangements for payment of rent. Unless the right paperwork is in place, you, the tenant, have to account for 20% tax on payments to foreign landlords. This can come as a nasty surprise.
Finally, do remember that UK domiciliaries (and also ‘non-doms’ who file on a worldwide basis) do need to declare all income and gains on offshore property in their tax returns. Omissions carry heavy penalties and the risk of criminal sanctions if there is evasion.
For further tax enquires and advise please contact Mark McMullen at Smith Williamson
It has always been good financial planning to have ones tax affairs in good shape; this minimises the chance of nasty surprises and has never been truer than today, with the Revenue’s focus on their more sophisticated “customers” (their word for taxpayers).
This brief note highlights some typical situations and their tax treatment:
Firstly, two non tax points which we often see causing issues in practice:
It is important to ensure that the legal ownership matches your intentions. For example, with property owned jointly, it will often be advantageous to hold it as ‘tenants in common’ rather than as ‘joint tenants’, as this provides flexibility for planning.
Again, it is important that your will provides a clear and efficient method by which your executors and heirs can deal with your properties. If there are international aspects to your affairs, you would be best advised to check that your solicitor is aware of these ++++
Now three common situations for UK property:
1 Owner occupiers
Here there is usually no Capital Gains Tax (the generous ‘Principal Residence Relief’ takes most properties out of tax) on sale.
There can be income and CGT issues if the property’s ownership is routed via a trust or company. Specialist advice is needed here.
Inheritance tax (IHT) is the biggest long term issue. In the recent past, offshore structure was commonly used but in recent years most owner-occupiers have sought to mitigate IHT by borrowing against the property or by life insurance.
Offshore mortgages used to provide some remittance planning opportunities for ‘non doms’ but their advantages have largely been taken away, albeit with some legacy positions.
2 Investment properties
It is very widely known, that all UK source rental income is subject to UK tax, at a rate of up to 50%, with effect from April 2010. The usual deductions apply. Annual filings are required.
The rules are more generous for Capital Gains Tax which is only charged if the owner lives in the UK (or in the case of a company owner, is resident in the UK).
IHT bites unless the property is owed by an offshore company. For a UK domiciliary, this will not give any advantage but for a ‘non-dom’, this can take the property out of the IHT net altogether.
3 Resident tenants
If you live in the UK and rent property from a foreign landlord, you need to carry out a quick check of the arrangements for payment of rent. Unless the right paperwork is in place, you, the tenant, have to account for 20% tax on payments to foreign landlords. This can come as a nasty surprise.
Finally, do remember that UK domiciliaries (and also ‘non-doms’ who file on a worldwide basis) do need to declare all income and gains on offshore property in their tax returns. Omissions carry heavy penalties and the risk of criminal sanctions if there is evasion.
For further tax enquires and advise please contact Mark McMullen at Smith Williamson
