South Africans considering a UK property purchase to earn a foreign income, should consider whether it’s more tax efficient to do so through a limited company structure, instead of in their personal capacity.
Whether purchasing a UK property as an individual or as a limited company, there are benefits and potential pitfalls based on your personal situation and goals. Scott Brown, director at Sable International, looks at the options and what is required.
READ: Where are SA's millionaires migrating to?
Individual tax as a non-resident landlord
Brown, says UK-resident landlords must declare their rental income in their annual Self-Assessment and then, if it's required, pay tax.
Non-resident landlords, however, should have their tax deducted automatically by managing agents or tenants, unless they register with HMRC’s Non-Resident Landlord Scheme to receive rental income gross. In this case, they will need to declare and pay tax on it as part of an annual tax return.
As an individual earning a UK-sourced income, you would need to file a tax return with HMRC every year. This tax return must be filed even if you’re not making a profit or owe no UK tax. The tax year runs from 6 April to 5 April and the return for that period must be filed and paid by 31 January of the following year.
Double Taxation Agreements
South Africa has a DTA (Double Taxation Agreement) with the UK, which prevents South African residents from being subject to tax in both countries on the same income.
As a result of this DTA, you are entitled to a tax-free personal allowance (currently £12,570 per year) on your individual UK income. This means that if you earn less than that, you don’t need to pay tax in the UK. However, your rental income must be added to your South African taxable income and you will likely have to pay tax on it in SA when you submit your return to SARS.
"If you earn over the UK’s personal allowance, you will need to pay tax on the remainder to HMRC. That amount can then be deducted from your SA tax as a tax credit.
"In both cases, your income will be taxed. However, the amount of tax you pay might be different depending on whether you pay it in the UK or in SA, because the countries have different tax brackets," says Brown.
Deductible expenses
Brown says, your taxable rental income is your income minus “wholly and exclusive” expenses relating to your property. This includes things like utilities, council tax charges, repairs and maintenance.
Improvements on the property are not tax deductible. Interest on your mortgage is also not 100% deductible. However, you are entitled to basic tax relief (which is currently 20%) on the mortgage interest.
Capital Gains Tax when selling your UK property
If you decide to sell your property, you will need to report this sale to HMRC, even if there is no Capital Gains Tax (CGT) liability.
You will need to set up a Capital Gains Tax on UK Property account and, within 60 days of sale completion, you will need to inform HMRC of all the details needed to determine your capital gain. From that amount, you can deduct the CGT relief of £12,300 (set to change to £6,000 in 2023 and then to £3,000 in 2024) and calculate the amount of capital gain tax owed, which needs to be paid within the 60-day period.
UK buy-to-let through a limited company
"One of the main benefits of owning your property through a company is that you can claim interest on a mortgage as an expense. This is partly why the total number of companies set up to hold buy-to-let property (sometimes called “special purpose vehicles”) has doubled since 2017, when this stopped being possible for individuals," says Brown.
READ: Top 5 strategies to help you make money in UK property
The challenges of setting up a UK limited company
"Limited company setup in the UK is relatively easy and can take as little as three to five days. You don’t need to be a UK resident to be a director or a shareholder. However, you do need to have a registered office address in England, which will be listed on the Companies House website and will be available to be viewed by the general public (this is something that we can help our clients with).
"The tricky part is that you will need to have a UK bank account. Many banks, whether high street or online, want someone within the company to be based in the UK. While there are banks that allow non-residents to open accounts, this is a complex process as there are a number of compliance hoops to jump through and it can take a few months to get set up. If you are planning to set up a limited company in the UK, you should start the process of opening your bank account as soon as possible to avoid delays further down the line," he says.
Corporation tax as a non-resident landlord
Brown explains that operating as a company in the UK comes with a number of compliance requirements. A UK company has to file financial statements and pay corporation tax to HMRC every year. You also need to file a confirmation statement at Companies House ever year (which is akin to re-registering your company annually).
UK companies pay tax at between 19% and 25% depending on the amount of profit the company makes.Unlike personal tax, there are no allowances. So, from the first Pounds you earn as a profit, you will be paying corporation tax.
Dividends and retained earnings
"When an individual landlord makes rental income, that money is immediately considered part of your personal earnings. However, companies can retain earnings. In simple terms, this means that the money stays within the company and can be allocated to shareholders, reinvested or even inherited as part of the company at a later stage.
"You can decide when to withdraw your earnings as dividends and will only need to pay personal tax on those dividends at that point. You can earn some dividend income each year without paying tax on it. Currently this allowance is £2,000, but it is set to drop to £1,000 in 2023, and then to £500 in 2024," says Brown.
Tax when disposing of the property
Capital gains within a company is considered company income, and corporation tax is therefore payable on it - once the capital gain has been calculated, taking into account expenses that can be deducted, the tax on the final gain will be calculated at the corporation tax payable by the company.
Limited company setup made easy
If you do choose to set up a limited company in the UK, our specialised accountants can assist you with the incorporation and, once that is completed, can provide you with all the necessary documents, including a Certificate of Incorporation, Memorandum and Articles of Association.
Stamp duty as a non-resident
As of April 2021, non-UK residents buying residential property in England and Northern Ireland need to pay an extra 2% of the property purchase price in Stamp Duty Land Tax. This amount is added to all ordinary residential rates (such as increased rates for owning multiple properties).
Even if you purchase a property through a company that’s registered in the UK, the fact that you are non-resident means you will be liable for this charge.
However, something interesting to note if you intend to emigrate in the near future, is that if you become UK tax resident within two years of purchasing the property, you will be able to file for a refund on this surcharge.
What about putting the property in a trust?
While trusts are a popular vehicle in South Africa, they’re less popular in the UK. The main reason we’d recommend using a limited company over a trust is that the more complicated your company structure (for example, where shareholders are trusts), the more difficult it is to set up a bank account in the UK and to apply for mortgages.
Should you set up a limited company for purchasing UK property?
Our belief is that if you plan to only purchase a single property, it's simpler to do so as an individual.
- You do not need to incorporate as a company and try to get a UK bank account.
- It might be easier to get a mortgage.
- There are a number of tax reliefs that you can get as an individual, depending on where you're from and Double Taxation Agreements.
- You only need to file a Self-Assessment, compared to company accounts.
However, if you plan to invest in multiple properties, it might be worth going through the extra trouble to save on tax in the long run.
- As a company, you can claim full mortgage interest against your profits.
- You can retain profits within the company and do not have to allocate the profits out to the shareholders.
- The corporation tax might be lower than what you’d end up paying as an individual.
Ultimately, it comes down to your individual circumstances, what UK property you're seeking to buy, how you're looking at financing that, and also what your long-term plan is.
READ: What foreign buyers and local sellers need to know about international property transactions
General tips for offshore property investment
- Find a company that you can trust locally to manage and run your asset for you. Especially when it comes to rentals, you will always need someone on the ground you can rely on to have your best interests at heart.
- Use a mortgage broker when seeking to borrow internationally. They will help you find the best deal for your particular circumstances and their knowledge of the local market will be invaluable. (We can assist directly with UK mortgages and have partners that can help across Europe and Mauritius.)
- Find out the growth percentage that can be expected in the location where you’re seeking to invest. Many socio-economic factors can impact the property market and the value in an area can change a lot in just a few years.
- For off-plan or equity investments, only work with established developers with a proven track record.
- Research rental expectations for the area you wish to invest in, as well as the general tenant profile.
- Understand your risk profile and investment timeline as these factors will impact which type of property investment is right for you.
- Seek assistance from specialists. Tap into the knowledge and experience of professionals familiar with the ins and outs of offshore real estate, who are transparent about their fees and who put your interests first.
Want all the latest property news and curated hot property listings sent directly to your inbox? Register for Property24’s Hot Properties, Lifestyle and Weekly Property Trends newsletters or follow us on Twitter, Instagram or Facebook.
Print
