BUYING AND SELLING REAL ESTATE IN ENGLAND AND WALES 113
by the gift. Since 6 April 2017, it is no longer possible to avoid an IHT exposure by holding UK residential property through an offshore company – the company is now effectively transparent for IHT purposes if it is the equivalent of a close company and its value is attributable, directly or indirectly, to UK residential property. Trusts holding shares in offshore companies with UK residential property interests require review, as they can now be subject to periodic charges to IHT and give rise to IHT issues for settlors who are also beneficiaries. Loans made to third parties to facilitate the purchase of UK residential property can, in certain situations, cause the lender to have an IHT exposure. Certain debts, however, remain deductible when calculating the value of an asset for IHT purposes. • Value added tax ( VAT ). This is applicable to commercial real estate only.
Commercial real estate is exempt from VAT unless the sale is of the freehold of a new or partly completed commercial property, or the owner opts to tax (which most do in practice). VAT is payable at the standard rate of VAT, which is currently 20%, unless it is possible to structure an acquisition as a transfer of a going concern ( TOGC ). A TOGC is generally available to a purchaser of investment real estate, but there are conditions that include the buyer registering for VAT and submitting quarterly VAT returns to the UK’s revenue authorities. The interrelationship of each of these taxes and the formalities which need to be complied with are complex and careful consideration needs to be given to their application to the acquisition of any specified real estate. By way of example, the following table compares ownership by an offshore company with personal ownership.
Ownership by Offshore Company
Ownership by Individual
Yes, annual charge, depending on value
Yes, on disposal on gains. At rates of 18% or 28% (residential) or 10% / 20% (commercial). Relief may be available if property used as main residence
Yes, rental income (mortgage interest will remain deductible) and on disposal on gains at 19%. No main home relief Participators in offshore company have IHT exposure (40% on death, subject to exemptions and reliefs)
Yes, immediate exposure (40% on death, subject to exemptions and reliefs) Rental income taxed at 20%/40%/45%. No deductibility of mortgage interest Stepped rates between 0% and 12%. Higher rates apply to purchases of residential buy-to-let and second residences. Additional rates apply
No (see CT above)
Potentially at higher flat 15% rate if purchase price >£500,000. Additional rates apply from 1 April 2021 to purchases by non-UK residents
ILN Real Estate Group – Buying and Selling Real Estate Series
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