Investing in UK real property?

With the Stamp Duty holiday available until 31 March 2021, it may be worthwhile to invest in real property in the United Kingdom.

To help buyers who have taken a financial hit due to the Covid-19 pandemic, the Stamp Duty nil rate band in England and Northern Ireland has been increased to £500,000. As a result, it is reported that the UK property market activity is currently the highest in the last four years.

If you are interested, what other tax considerations do you have to into account if you are a Belgian resident. These are some of the most common questions by Belgian residents thinking of purchasing a buy-to-let property in the UK:

Taxes in the UK

As a Belgian tax resident, when you purchase a UK property as an investment, you have to consider the UK tax implications, when you buy, when you receive income from your property, when you sell it or leave your property to the next generation. You need to be aware of the requirement to register to be a non-resident landlord, the deadlines for submitting tax returns and paying tax on the income and the capital gains.

1. When you purchase a property in the UK

In England and Northern Ireland, Stamp Duty Land Tax is due.  Until 8 July, the bands and rates for England were:

Purchase priceSingle HomeownersInvestors / Second homeowners
Below £125,000 0% 3%
Portion from £125,001 to £250,000 2% 5%
Portion from £250,001 to £925,000 5% 8%
Portion from £925,001 to £1.5m10%13%
Portion above £1.5m12%15%

Until 31 March 2021, the nil rate band has been raised to £500,000, giving a tax saving of up to £15,000.

If you already own a property, you generally pay a 3% Stamp Duty Land Tax surcharge on top of the normal Stamp Duty rates even if the value of the property falls within the £500,000 nil rate band. From 1 April 2021 a further surcharge of 2% is set to be applied for non-UK residents purchasing UK property. This would make the highest rate of Stamp Duty payable for a non-resident purchasing an investment property in England 17%.

It is worth noting that in Wales the tax is called Land Transaction Tax, and in Scotland Land and Buildings Transaction Tax with different bands and rates.

2. Income tax

Non-UK residents are, generally, liable to tax on income originating in the UK, including any income from letting your UK property.

Allowable expenses are all direct costs of letting the property, such as agents’ fees, legal fees for lets of a year or less, or for renewing a lease for less than 50 years, accountants’ fees, buildings and contents insurance, interest on property loans, maintenance and repairs to the property (but not improvements), utility bills (gas, water and electricity), rent, ground rent, service charges, Council Tax, services for cleaning or gardening, etc … There may be other allowable expenses for furnished residential properties, furnished holiday rentals and commercial properties.

If you are an EEA citizen or hold a British passport you are generally entitled to a tax-free personal allowance of £12,500 (per person) of profit from UK tax. You may also be entitled to the double tax treaty between Belgium and the UK.

Anything above that is taxed at rates of 20%, 40% and 45%.  if you are not entitled to a tax-free personal allowance any profit made will be taxable.

If a couple invests in real property in the UK, consider if it makes sense to own the property in both names. If only one of you is entitled to a tax-free personal allowance, it might be advisable to have the property owned in their name and use their allowance. Keep in mind that this may be useful for the Belgian tax situation as well.

3. The Non-Resident Landlord Scheme

Tenants or agents are required to deduct 20% tax from the rental income they pay to a non-resident landlord, irrespective of whether that income is taxable or not.

You can stop that tax being deducted at source by signing up to the “Non-Resident Landlord Scheme”. If you do, the UK tax authorities (HMRC) will authorise your tenant or agent to pay your rental income without deducting any tax at source.

4. Tax return

It is very likely that you will have to submit annual tax returns to report any income from letting a UK property. HMRC states that if your gross profit is above £10,000 or the net profit (net profit is gross profit less allowable expenses) is above £2,500 then you need to complete an annual Self-Assessment tax return.

At present, that form needs to be submitted by 31 January of the year after the tax year. The current tax year starts on 6 April 2020 and ends on 5 April 2021; the tax return must be filed by 31 January 2022 which is also the due date for any tax to be paid.

The UK plans to move to a “Making Tax Digital” reporting regime and this may well result in quarterly reporting and quarterly tax payments from 6 April 2023.

5. Selling your property

Even if you are not a UK resident, the sale of UK land and property is liable to UK Capital Gains Tax since 5 April 2015.

Capital Gains Tax rates for the sale of your UK property are charged at the highest rates of 18% and 28% depending on your income tax rates. Selling or gifting any UK property must be reported to HMRC within 30 days and any tax due needs to be paid within 30 days as well.

There are special rules if you have been non-resident for less than five years, if you owned your UK property before 5 April 2015 or if you have ever lived in the property as your home.

6. UK Inheritance Tax

If you are domiciled in the UK, inheritance tax is due on the value of your estate. The tax is charges at 40% on assets above £650,000 for a couple.

Whether you are deemed domiciled is a complex matter, it is not the same as your tax residence.

Assuming you are a Belgian resident, your UK investment property will be liable to UK inheritance tax. Spouses do not pay inheritance tax, and children only pay inheritance tax on the value over £650,000.

As inheritance tax will be due in Belgium as well, it is important to plan your tax affairs carefully, and factor in the inheritance tax exposure when purchasing your UK investment property.

Tax in Belgium

It is also important to consider any tax implications and reporting requirements you have in Belgium for your UK property.

1. When you purchase a property in the UK

When you buy property in the UK, you only pay the stamp duty; no tax is due in Belgium.

2. Income tax

Belgium taxes all income, including rental income from a property abroad, but under the double tax treaty between Belgium and the UK, Belgium must exempt rental income from UK properties. However, Belgium exempts with progression.

This means that you must declare the income in your Belgian tax return as well.

If you have a buy-to-let, you must declare the actual rent you receive. You cannot deduct any expenses, but the tax authorities will give you an allowance to cover maintenance and repairs and deduct 40%.

You can still deduct the income tax you paid on the property in the UK.

Remarkably, Belgium also taxes a hypothetical income from a second residence that is not let. In that case, you must declare the rental value. This is the rental income you would normally receive if you were to rent out the property.

The tax base for overseas property held by Belgian taxpayers is much higher than the tax base for Belgian property and the Court of Justice of the European Union has repeatedly condemned Belgium for this, and as recently as last week. Belgium must now change this rule.

Many anticipate that this means that Belgium will start charging tax on the actual rent. However, just abandoning exemption with progression may be the short-term solution.

This case law only applies within the EU, and when the UK leaves the EU, you may not be able to rely on this case law.

Even if you have to declare the rental income and the rental value, Belgium must exempt the rent or the rental value. Belgium will give you treaty relief by way of “exemption with progression”. 

“Exemption with progression” means that Belgium exempts the rental income, but the Belgian tax authorities will take account of this exempted income to determine the tax rate that applies to any income that is taxable in Belgium. In effect this pushes your Belgian income in the higher tax brackets.

Even if the income is exempted, you still have to pay taxe communale on top of the Belgian tax that would theoretically be due on the rental income or the rental value income of the property in the United Kingdom.

If a couple invests in real property in the UK, it may be advisable to hold the property in the name of the partner who does not have any income tax is taxable in Belgium. The exemption with progression then has no effect.

3. The Non-Resident Landlord Scheme

If the tenant or agent deducts 20% tax from the rental income that they pay you, you can deduct that tax from the rental income you declare in Belgium.

4. Tax return

If you own property abroad, you need to declare that as well (normally in codes 1130/2130) as Belgium will normally have a double tax treaty (list) with the other country. If there is no treaty, the codes are 1123/2123.

If the tenant deducts 20%, you can deduct that from the rent you declare.

If you opted for the Non-Resident Landlord Scheme; you can only deduct the tax you pay when you pay it. If you pay UK income tax in January 2022 for rent from 2020 and 2021, you can only deduct it from your rental income in 2022.

When the UK introduces the “Making Tax Digital”, you will be paying the tax during the year and you will be able to deduct it from the rental income you received during the year.

5. Selling your property

When you sell the property, capital gains tax will be due in the United Kingdom

Belgium does not, as a rule, charge capital gains tax, except on property that is bought and resold. Under the double tax treaty between Belgium and the UK, Belgium must exempt the capital gain, with progression. However, if tax is due, the progression would not affect other income as the tax rate for capital gains is a fixed rate

6. Belgian Inheritance Tax

Belgium charges inheritance tax on the worldwide estate of Belgian residents, even on real property in the UK.  If UK inheritance tax has been paid, that can be set off against the Belgian inheritance tax but the set-off is limited to the tax due on the UK property.

Even if no inheritance tax is due in the UK because of the spousal exemption or the £650,000 nil rate band, inheritance tax will be due in Belgium, first when the spouse inherits and then when the children or other heirs inherit. The inheritance tax rate depends on the relationship between the deceased and the heir.

The Belgian inheritance tax can be mitigated by a “fideicommissum de residuo” so that upon the second death the children pay inheritance tax as if they inherit from both parents. And there are techniques to transfer the inheritance tax that is due by the surviving spouse on to the children who will pay less inheritance tax.

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