Tax residence is a fundamental aspect of international taxation, and understanding it is essential for individuals and businesses to effectively manage their tax obligations. One crucial document in this context is the Tax Residence Certificate (TRC). A TRC serves as official proof from a relevant tax authority of an individual’s or entity’s tax residency status in that jurisdiction, enabling them to benefit from tax treaties, claim tax refunds, and avoid double taxation. By establishing tax residency, individuals and businesses can navigate the complexities of international tax laws more efficiently, ensuring compliance and optimising their financial positions.

In this article, we will delve into the concept of the Tax Residence Certificate, discussing its definition, significance, and common uses. Additionally, we will provide guidance on the application process, supported by a practical case study to illustrate the real-world application and benefits of obtaining a TRC.

What is a Tax Residence Certificate?

A Tax Residence Certificate (TRC) is an official document issued by the tax authorities of a country to confirm that an individual or entity is a tax resident of that country. This certificate is crucial for individuals and businesses involved in cross-border transactions as it helps in establishing the tax residency status for the purposes of Double Taxation Avoidance Agreements (DTAAs).

Key Uses of a Tax Residence Certificate

1. Avoidance of Double Taxation The primary use of a TRC is to avail benefits under DTAAs. These agreements are made between two countries to avoid double taxation on the same income. With a TRC, a taxpayer may claim tax relief or exemption on income earned in a foreign country.

2. Proof of Residency For individuals and businesses operating internationally, a TRC serves as proof of tax residency. This is particularly important when dealing with foreign tax authorities or financial institutions who need to hold such proof to comply with the Common Reporting Standards.

3. Reduced Withholding Taxes In many cases, the withholding tax on income such as dividends, interest, or royalties can be reduced if a valid TRC is provided. This ensures that the taxpayer does not pay more tax than necessary.

How to Apply for a Tax Residence Certificate

The process of applying for a TRC can vary depending on the country, but typically involves the following steps:

1. Determine Eligibility Ensure that you meet the residency criteria of the country in question. This often involves physical presence, permanent home, or significant economic ties.

2. Prepare Documentation Gather necessary documents such as proof of residency, tax returns, and any other required forms. The specific requirements will vary by country.

3. Submit Application Complete the application form and submit it along with the supporting documents to the relevant tax authority.

4. Await Approval The tax authority will review the application and, if satisfied, issue the TRC. The processing time can vary.

Case Study: John’s Journey to Obtaining a Tax Residence Certificate

To illustrate the importance and application process of a TRC, let’s consider the case of John, a UK-based entrepreneur who has expanded his business operations to France.

John has been living in the UK for the past several years and has established significant ties to the country. However, his business activities in France have grown, and he is now receiving substantial income from French sources. To avoid or mitigate double taxation on his French source income, John needs to obtain a TRC from the UK tax authorities.

Steps John Took:

1. Eligibility Check John confirmed his eligibility by reviewing the UK’s statutory residency test and ensuring that he meets the conditions for being considered a UK tax resident.

2. Documentation He collected his proof of residency, including his UK tax returns for the past few years, and details of his business operations in France.

3. Application Submission John’s accountant completed the necessary application form (available from HM Revenue & Customs) and submitted it along with the supporting documents.

4. Approval After a few weeks, John received his TRC, which he then submitted to the French tax authorities to claim relief under the UK-France DTAA.

Conclusion

A Tax Residence Certificate is a vital document for anyone engaged in cross-border financial activities. It helps in avoiding double taxation, proving tax residency, and reducing withholding taxes on income earned abroad. At Dixcart UK, we assist our clients in navigating the complexities of international tax laws, including obtaining TRCs. If you need help with your tax residency matters, feel free to contact us for expert guidance and support.

For more detailed information and assistance, please contact us at: hello@dixcartuk.com.

This article is intended to provide a general overview and does not constitute legal or tax advice. For specific circumstances, it is advisable to seek professional guidance.

From a UK perspective, the determination of corporate tax residency is crucial for understanding a company’s tax obligations. A company is considered a UK tax resident if it is either incorporated in the UK or if its central management and control (CMC) actually resides in the UK. This residency status dictates the scope of the UK’s taxing rights over the company.

Criteria for UK Tax Residency

• Incorporation in the UK: Any company incorporated in the UK is automatically deemed a UK tax resident.
• Central Management and Control: A company not incorporated in the UK can still be considered a UK tax resident if its central management and control abides in the UK. This criterion involves determining where the company’s ‘paramount authority’ is exercised, which typically involves the board of directors.

Tax Implications for UK Tax Resident Companies

UK tax resident companies are subject to UK corporation tax on their worldwide income and gains. This means that all profits, regardless of where they are generated, are taxable under UK law. In contrast, non-UK tax resident companies are generally only subject to UK corporation tax on profits attributable to a UK permanent establishment. Additionally, they are liable for UK income tax on certain UK-source income.

Determining Central Management and Control

The question of where a company’s central management and control resides is a factual one. Key points to consider include:

• Exercise of Paramount Authority: The central management and control is where the company’s paramount authority is exercised, usually by the board.
• Influence vs. Control: Influencing the board does not equate to controlling it. The distinction is crucial in determining the true locus of control.
• Rubber Stamping: Courts are vigilant against scenarios where the board merely rubber-stamps decisions made by others, which would indicate that the real management and control lie elsewhere.

Dual Tax Residency

A company can be dual tax resident, meaning it is considered a tax resident in two countries. In such cases, the corporate residency rules of both countries must be examined. If a dual residency situation arises, a tax treaty (if one exists) between the two countries will typically determine which country has the primary taxing rights. These treaties often provide mechanisms to resolve dual residency conflicts to prevent double taxation.

Conclusion

Understanding where a company’s central management and control resides is essential for determining its tax residency and, consequently, its tax obligations in the UK. Companies must carefully assess their management structures and operations to ensure compliance with UK tax laws and to navigate the complexities of dual tax residency effectively. This explanation is a simplified overview, and there are many additional factors that can come into play. Therefore, it is always advisable to contact a tax professional to obtain tailored advice and ensure all specific circumstances and nuances are properly addressed.

For more information from us, or if you wish to discuss corporate tax residency, enquire or contact us at hello@dixcartuk.com.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Introduction:

Recent statements from the Prime Minister announced forthcoming changes to company size classifications, promising to streamline reporting obligations for businesses nationwide. These adjustments, stated to take effect later this year, aim to simplify both non-financial and financial reporting processes for Small and Medium Enterprises (SMEs), aligning with evolving post-Brexit regulatory freedoms.

Key Developments:

As of March 18, 2024, the government revealed plans for significant deregulatory measures, including a noteworthy 50% increase in the thresholds dictating company sizes. This adjustment is poised to redefine the classification of a substantial number of businesses, potentially granting relief to around 132,000 entities by alleviating certain non-financial reporting burdens.

Proposed Changes:

The proposed modifications to company size thresholds, stated for implementation for financial years starting October 1, 2024, are summarised in the table below:

Additionally, governmental initiatives will:

• Streamline reporting obligations by eliminating redundant or outdated requirements from the Directors’ Report and the Directors’ Remuneration Report and Policy.
• Facilitate the transition to digital annual reports for companies.
• Address technical intricacies in the audit regulatory framework stemming from the integration of EU law into UK legislation.

Future Considerations:

Looking forward, the government plans to further engage in consultations regarding additional measures, with a particular focus on medium-sized companies. These discussions may encompass exemptions from producing strategic reports and potential adjustments to the employee size threshold, possibly raising it from 250 to 500 employees.

Conclusion:

The forthcoming adjustments to company size classifications underscore the UK government’s proactive stance in fostering a regulatory environment conducive to business growth post-Brexit. By simplifying reporting requirements and alleviating administrative burdens, these measures aim to bolster the resilience and prosperity of SMEs while ensuring regulatory compliance. As businesses brace for these impending changes, staying informed about updates and guidance will be paramount for navigating the evolving regulatory landscape effectively.

To find out how we can help your business, or if you have any questions regarding the changes in Company size classifications, please contact us.

The Government has responded to the views of farmers and the motor industry who were potentially going to be negatively affected by the proposed change to the benefit in kind tax treatment of Double Cab Pick Ups (DCPUs).

What Was the Previous Guidance?

Following a 2020 Court of Appeal judgment, the guidance had previously confirmed that, from 1 July 2024, DCPUs with a weight load capacity of one tonne or more would be treated as cars, rather than goods vehicles for both capital allowances and benefit-in-kind purposes.

New Guidance

The government has recognised that the 2020 court decision and resultant guidance could have had an impact on businesses and individuals in a way that would be detrimental to the government’s wider aim to support businesses, including essential motoring, such as van drivers, and the farming industry. 

• On 19 February 2024, HMRC announced that its previous guidance would be withdrawn, meaning that DCPUs will continue to be treated as goods vehicles rather than cars, and businesses and individuals can continue to benefit from its historic tax treatment.

The government has made it clear that it will be legislating to ensure that DCPU vehicles continue to be treated as goods vehicles for tax purposes and will consult on the draft legislation to ensure that this is achieved, before introducing it in the next available Finance Bill.

Tax Implications

The tax on the benefit-in-kind will now not increase, when employers provide such vehicles to their employees.

In addition, the capital allowances available in the first year of use will now not be reduced when a business purchases this vehicle for use in their trade.

The Exception

This update is only with reference to DCPUs with a payload of one tonne or more. DCPUs with a payload of less than one tonne will continue to be treated as cars.

Additional Information

If you would like to discuss any matters in relation to Double Cab Pick Ups, raised in this article, please contact Paul Webb: hello@dixcartuk.com

Introduction

In this scenario a UK resident individual, let’s call him John who was in his early 70’s and a widower, found himself facing a significant Inheritance Tax bill. Having a UK property worth £500,000 and investments amounting to £600,000, John contemplated a strategy to mitigate the inheritance tax (IHT) impact without seeking professional advice.

The Risky Plan

In an attempt to sidestep inheritance tax, John considered selling his house to his son, who resides in Guernsey, a country with no inheritance tax. The plan involved his son, (who had recently sold his business for several million pounds) purchasing the property, and John sending the proceeds back to him as a gift but with John still living in the house. The goal was for John to live for another seven years, hoping to avoid hefty inheritance tax charges.

Professional Analysis

However, our team of experts quickly pointed out the flaws in this plan. The proposed scheme of “selling” the house to the son, only to later gift the proceeds  back would not be acceptable to HM Revenue and Customs. The Gift with Reservation of Benefit (GWR) rules state that if an asset is given away but the donor continues to benefit from it, it will still be taxed as part of John’s estate for IHT purposes.

Additionally, the Pre-Owned Assets Tax (POAT) which introduced an income tax charge on benefits received by the former owners of property could also have applied however a way around this is to pay a commercial rent for continuing to live in the house you have gifted.

Essentially, the plan would have been ineffective, and the value of the property would remain in John’s estate for inheritance tax purposes.

Additionally, the son’s residence in Guernsey did not exempt the property from UK-based IHT (since it was UK sited), potentially leading to complexities in the future.

Professional Advice

What if John had sought professional advice from Dixcart UK before embarking on this risky endeavour? Let’s walk through it.

• Scenario Planning:

Dixcart UK, with its team of accountants, tax advisers, and lawyers, could have guided John through a comprehensive scenario analysis. By understanding John’s financial situation, Dixcart professionals could have illustrated the potential outcomes of various strategies, highlighting the risks and benefits associated with each.

• Strategic Gifting:

Instead of opting for a convoluted plan that involved selling the house and repaying the proceeds, Dixcart could have advised John on more straightforward and legally sound methods of mitigating inheritance tax. One such approach might involve strategic gifting within the allowable limits set by legislation or making Potentially Exempt Transfers (PET’s) of the financial assets owned by John.  A gift of cash for example would be a PET and so if John was to survive for 7 years from making the gift then the PET escapes IHT altogether. PETs made out of the 7 year period will never be brought into the IHT calculation.  Gifts made out of excess income can also be an effective strategy.

• Utilising Tax Allowances

Dixcart UK could have helped John leverage his nil-rate band (£325,000), his late wife’s nil-rate band (potentially up to £325,000), along with his own residence nil-rate band (£175,000) and his late wife’s (£175,000), making a total of £1 million in allowances. Exploring options like gifting a portion of his investments within this allowance could have been a more tax-efficient and transparent strategy.

• Long-Term Planning:

Moreover, Dixcart UK could have assisted John in developing a long-term inheritance tax mitigation plan. By understanding John’s financial goals and family situation, the professionals could have provided guidance on how to structure his estate in a tax-efficient manner, ensuring a smoother transition of assets to the next generation.

Conclusion

John’s case serves as a powerful illustration of the pivotal role professional advice plays in navigating complex financial decisions. Seeking guidance from Dixcart UK could have potentially saved John from the complications and financial pitfalls he faced. The case underscores the importance of consulting professionals in accounting, tax advisory, and legal services to ensure individuals make informed decisions and avoid unnecessary financial burdens.

By exploring the hypothetical scenario where John had come to Dixcart UK first, we emphasise the proactive role professionals can play in securing a sound financial future and mitigating risks associated with inheritance tax. This case study aims to reinforce the value of expert consultation and strategic planning in safeguarding individuals from unforeseen financial consequences.

Get in Touch

If you have any questions regarding the tax implication and inheritance planning, please get in touch at: hello@dixcartuk.com

As of 1 January 2024, Pillar 2 (BEPS 2.0) came into effect, as recommended by the OECD, where multinational companies are subject to a global minimum tax of 15% which will apply for the first time for certain large economies – agreed by more than 140 countries under the OECD Inclusive Framework.

In the digital age and face of globalisation, the global economy has transformed – with countries facing pressure to lower their corporate income tax rates to offer incentives to compete for capital and investment. Building on BEPS actions and placing a floor under tax competition, the OECD, together with member countries, have addressed the collective action problem for the so-called race to the bottom.

A series of interlocking rules apply to companies taxed below the 15% rate in one country (with the possibility of other countries being able to apply a top-up tax), which is summarised below in six steps:

Step 1: Determination of Multinational Groups in Scope

The following steps apply in determining which multinational groups are in scope:

1. Internationally active groups – determination as to whether the group has entities or permanent establishments in more than one jurisdiction, is required;
2. Groups with annual revenue of €750 million or more, in at least two out of the four prior years immediately preceding the fiscal year being tested; and
3. Identify excluded entities from the application of the Pillar II rules (but note that these are not excluded from the revenue threshold calculation above).
   • Public interest entities, such as governmental and non-profit organisations, tax-neutral entities (such as pension and investment funds), and certain asset-holding companies are excluded.

Step 2: Allocation of Income to Constituent Entities on a Jurisdictional Basis

The multinational group needs to determine the income (abbreviated as FANIL for Financial Accounting Net Income or Loss – determined by accounting standards for financial reporting) and the location of each constituent entity, to identify the respective local tax treatment.

Step 3: Calculation of GloBE Income

Global Anti-Base Erosion (GloBE) income is calculated by making adjustments to FANIL to align the tax base for the global minimum tax with those that are typically applied for local tax purposes. Types of adjustments include:

1. Adjustments to financial accounting income to better align with taxable income – net taxes, dividends (avoid double counting profits within a group), equity gains and losses (unrealized – no impact for GloBE; realized – may need adjustments for timing differences between accounting and tax), asymmetric forex gains and losses (differences in treatment between accounting and tax require reconciliation to align with taxable income), pension expenses (use of tax accounting principles), stock-based compensation (portion deductible for tax added to GloBE income);
2. Correct allocation of income between jurisdictions is adjusted for – such as transfer pricing adjustments and intra-group financing;
3. Policy-based adjustments – such as the disallowance of illegal payments such as bribes, or payments of fines and penalties (only allowed to a maximum of €50,000).

Step 4: Determination of Adjusted Covered Taxes

For each constituent entity, the GloBE income or loss is calculated. The tax associated with the income must then be calculated using the following steps:

1. Determination of covered taxes – the current tax expense as shown in the financial accounts (includes incomes taxes, but does not include non-income-based taxes such as indirect taxes, payroll and property taxes);
2. Adjustment to covered taxes – to consider taxes that are not recorded in the tax line of the profit or loss statement and exclude taxes not related to GloBE Income or Loss, addressing of temporary differences as well as tax credits;
3. Cross-border allocation – adjustment to allocate certain cross-border taxes to the proper constituent entity (like taxes imposed under a CFC regime, distribution taxes, withholding tax on dividends paid, or other taxes paid);
4. Post-filing adjustments – in the case of post-filing adjustments, generally an ETR recalculation is required for the relevant fiscal year (examples include audit or transfer pricing adjustments).

Step 5: Computation of ETR and Calculation of Top-Up Tax

GloBE income or loss and covered taxes (steps 3 and 4 above) from the same jurisdictions must be added together to determine the jurisdictional effective tax rate (ETR).

Note an exemption applies for multinationals that have limited operations, namely, below the de minimis thresholds of €10m for revenue and €1m for income.

From GloBE, a substance-based income exclusion is deducted to reduce the potential burden on multinationals with genuine operations and investments in a jurisdiction. A percentage of tangible assets and payroll expenses is applied for the purpose of the substance-based income exclusion.

The top-up tax percentage is due on the difference between the 15% minimum rate and the ETR in the jurisdiction – the delta which is applied to the GloBE income or loss in the jurisdiction, after deducting a substance-based income exclusion.

Each constituent entity, with GloBE income, is subsequently allocated top-up tax.

Step 6: Charge the Top Up Tax under QDMTT, IRR, or UTPR

A member jurisdiction has a liability towards a top-up tax for a multinational group under three types of provisions, in the following agreed rule of order:

1. If your domestic tax already hits the global minimum, you won’t be hit with extra “top-up” taxes from other countries – referred to as the Qualified Domestic Minimum Top-Up (QDMTT);
2. If the jurisdiction where the low-taxed constituent entity is located does not have a domestic minimum top-up tax, the ultimate parent entity, in proportion to its ownership interest, might collect the top-up tax under IRR (Income Inclusion Rule);
3. If the ultimate parent entity is in a jurisdiction that has not implemented a domestic minimum top-up tax, then the top-up tax will be levied on the next entity in the ownership chain that is located in a jurisdiction with an IRR following a top-down approach;
4. Where IRR does not apply, the Under-Taxed Payment Rule (UTPR) becomes applicable. UTPR acts as a back-up to the IRR, ensuring a top-up tax payment within jurisdictions applying this rule.

Specific Rules for Each Jurisdiction

Members will need to implement the GloBE rules in a way that is consistent with the outcomes provided in the agreed rule order, to ensure transparent and predictable outcomes across jurisdictions. Note that the legislative draft GloBE rules accommodate a wide range of multinational groups and tax systems. The OECD have recommended Pillar 2 rules to become effective in 2024.

Conclusion

The implementation of Pillar 2 marks a significant step towards creating a more level playing field and addressing tax challenges arising from the digital economy. Ultimately, Pillar 2 represents a critical step towards a more equitable and sustainable global tax system. Its impact will depend on effective implementation, addressing potential concerns, and continuous evaluation to ensure it meets its intended goals.

Additional Information

If you would like to discuss any of the matters raised in this article, please contact Paul Webb hello@dixcartuk.com

There has been much written about Jordan Henderson in recent weeks.  He has expressed a desire to leave his current club in the Saudi Pro League and return to playing in Europe.  As the Liverpool captain to lift both the Champions League and Premier League trophies, obviously, the footballing side to the story is more likely to take the headlines.  However, even as a footballer, nobody can escape the UK tax rules!

The example in this article is only to highlight the considerations anyone leaving or returning to the UK should consider.  Whilst Jordan Henderson is a high-profile example of this, the facts analysed are only loosely based on his situation and not specifically him (although it might sound a lot like him!) and, if he happens to be reading this, should not be construed as formal advice.  As is always the case with UK tax or legal matters, please take advice at the earliest time possible when a move is being considered!

Statutory Residence Test

The UK tax year commences on 6 April each year (the reason for this is very boring but it involves the Pope and the Gregorian calendar) and runs to the following 5 April.  Whether someone is tax resident during that year is assessed in accordance with The Statutory Residence Test.  For additional articles on this test, please search here. 

It is a complex set of rules but essentially it considers both days spent in the UK, and other connecting factors.  A complete analysis of the rules is outside the scope of this article but let’s assume our protagonist is someone who has played Premier League football for over a decade and has ticked all the boxes to be tax resident in the UK right up until the time they look to move to another club in another country.

Leaving the UK

In the summer of 2023, as they are driving home from the last match of the season, they receive a phone call from their agent to be told they have been offered a lucrative contract to play in an emerging league in Saudi Arabia.  Not only will the wages be significant, but they will also be tax-free. 

They and their family are so excited, they decide to accept the contract, rent out their house and jump on a plane heading for warmer climes. It is, say, 83 days into the tax year, around half of which he has worked on. 

Given they have been UK tax resident in the years prior to them leaving and have been in the UK for those days leading up to the move (having not made it to the European cup final in Istanbul in May), they will be UK tax resident at least up until that point.  Fortunately, the UK does allow for a taxpayer to “split” a year into a resident and non-resident portion in some circumstances.

As they have moved to Saudi Arabia for the purposes of taking up a new job, we shall assume that the split year rules might apply in this case for illustrative purposes.

This being the case, they will have suffered UK tax on their earnings in the first part of the tax year, but once they have become non-UK tax resident, their ongoing earnings will no longer be subject to UK taxation.  Except there are a couple catches…..

1. The Statutory Residence Test

A full analysis of the rules is outside the scope of this article but let’s assume with 83 days in the UK during the tax year, they have satisfied the residence rules for the year.  It is therefore important that the split year rules will apply.

• Split year

Where one is looking to apply the split year rules, in a year you are looking to leave the UK, you must not only remain non-resident during the tax year in question, but also be non-UK tax resident in the following year.  This being the case, if they return to the UK in the January transfer window, the split year rules will not be applicable and their full year’s earnings will be taxable to UK income tax.

Conclusion

If our unidentified footballer is keen on playing European football to get back into his national team, they should not return to the Premier League and instead consider taking the contract on offer from another European club.  A word of caution though, don’t forget to take tax advice in the other country too. 

If you require additional information on this topic, further guidance regarding your possible entitlement to use the UK remittance basis of taxation, and how to properly claim it, please contact your usual Dixcart adviser in the UK office: advice.uk@dixcart.com.

Dixcart UK, is a combined accounting, legal, tax and immigration firm.  We are well placed to provide these services to international groups and families with members in the UK. The combined expertise that we provide, from one building, means that we work efficiently and coordinate a variety of professional advisers, which is key for families and businesses with cross-border activities.

By working as one professional team, the information we obtain from providing one service, can be shared appropriately with other members of the team, so that you do not need to have the same conversation twice!  We are ideally placed to assist in situations as detailed in the case study above. We can provide cost effective individual and company administration services and also offer in-house expertise to provide assistance with more complex legal and tax matters.

In a move to tighten the tax net, HMRC has announced new measures affecting individuals engaged in online “side hustle” activities, such as selling clothes on Vinted, letting out spare rooms on Airbnb, or trading goods on eBay.

As of January 1, 2024, digital platforms like these are now obligated to collect and share transaction details with tax authorities, signalling a global effort to curb tax evasion. This article aims to provide insights into the implications of these changes and offer guidance on what online sellers need to do to ensure compliance with the new rules.

The Impact of New Rules

The new regulations require platforms to routinely report sellers’ income, covering various transactions such as; sales of handcrafted goods, second-hand clothes, taxi services, food delivery, freelance work, short-term accommodation lets, and more. This information will be shared among countries that have adopted the OECD tax rules, facilitating a concerted effort to clamp down on tax dodgers.

What are the Key Obligations for Online Sellers?

1. Tax-Free Allowances: Individuals already paying tax do not need to alter their current practices. There is a £1,000 tax-free allowance for income generated through property and a similar allowance for “trading” income, applicable to activities like tutoring, gardening, or selling new or second-hand items online.

2. Record-Keeping: While those earning below the specified thresholds may not be required to fill in a tax return, it is advisable to maintain detailed records in case they are requested by tax authorities.

3. Thresholds for Reporting: Platforms will report information to HMRC at the end of January 2025 for sellers whose activity is of significant size. The reporting obligation applies to sellers making more than 30 transactions or £1,735 a year. Sellers below these thresholds are not subject to reporting requirements.

Advice for Online Sellers

It is likely that only a small proportion of casual users of sites like Vinted and eBay will trigger the reporting thresholds, but individuals are required to assess their own tax situation.

If you believe that you may have surpassed the minimum £1,000 trading allowance, then the team at Dixcart can help.  We can also help you make contact with the tax authorities as it is advisable to contact them pre-emptively, if there is any income to declare. If you would like any further information on the changes and how this affects you, please don’t hesitate to contact your usual Dixcart UK contact or enquire at hello@dixcartuk.com

With the festive TV adverts appearing on our screens, thoughts inevitably turn to staff Christmas parties and gifts.   In this this article we look at the often misunderstood tax and VAT consequences of functions and staff gifts.

Entertainment

In general, the cost of business entertainment, e.g. treating a client to lunch or tickets to a football match, is not deductible for tax purposes. However, there is an exception for staff entertainment.

The cost of entertaining staff will be fully deductible for corporation tax purposes, as long as it is not merely a small part of the cost of entertaining non-staff. For example, if a company holds a lavish ball for 100 clients, and invites a few key staff along, the staff entertainment is merely incidental to the excluded business entertainment and the cost won’t generally be allowable. The crux is to ask ‘What is the main motive for incurring the expenditure?’. As long as the (honest) answer is to entertain staff, there is no problem.

There is no upper limit to what a company can claim for staff entertainment. This sometimes raises eyebrows, as some people will swear that they ‘know’ there is a £150 per head limit. But, this applies for income tax purposes from the perspective of each individual employees.

The £150 limit

Where people, including business owners, sometimes mix things up is the £150 exemption for benefit-in-kind purposes. It would slightly defeat the objective for employees to be invited out for a Christmas party with their employer, only to be told that they owe tax on it later on. To avoid this, there is an exemption as long as the cost per head does not exceed £150 (including VAT) each year. But again, there can be confusion as to how this operates.

Firstly, it is important to note that it is not an allowance. A company cannot spend £160 per head and deduct £150 from the employees’ taxable benefit in kind. If the per-head cost exceeds £150, it is all subject to income tax and Class 1A NIC.

Secondly, many owners are aware that the exemption can be spread across more than one event during the year. However, it is crucial to understand that these have to be annual events, e.g. Christmas parties, a summer ball, etc. It can’t be used for things like occasional drinks, or lunches. It is also sometimes incorrectly believed that the expenditure toward the limit is added on a cumulative basis. It is not, and the exemption can be used against whichever qualifying event suits best. For example, if a summer ball is held at a cost of £80ph, and a Christmas party is held at £125ph, the exemption can be claimed against the later event.

Thirdly, the event(s) in question must be open to all staff. It cannot just be for directors, managers, etc. However, it is permissible to restrict attendees by location, for example where there are multiple branches of a business, it is fine to hold separate branch-specific functions.

There can be a problem where a company is required to pay upfront. The £150ph limit applies to attendees, not invitees. So, if a number of staff are taken ill or do not attend for any reason, the average cost can increase.

Note that employees can bring guests and they will be included in the head count when checking if the £150ph has been exceeded.

If the limit is exceeded the employer has the ability to enter into a PAYE Settlement Agreement (PSA), whereby they agree to pick up the tax and NIC costs, but these do have specific compliance requirements and can in practice prove costly. 

VAT on entertainment

The position for reclaiming input tax is slightly different.

Generally, no input tax can be claimed on business entertainment costs, but there is an exclusion from this block, for employee entertainment. Recovery will be allowed in full, in respect of the cost of entertaining staff, including the directors, as long as all staff are entitled to attend. Unlike for income tax, there is no upper limit.

However, there is a different catch to consider with VAT. If there are non-staff guests attending, the company has to apportion the input tax between staff and non-staff attendees. So, if there are 30 staff and they each bring a partner, etc. that is not an employee, only half of the input tax will be recoverable.

This problem can be alleviated by making a token charge to the non-staff attendees. For example, if the true cost is £60ph, then making a charge of £10 for non-staff attendees means recovery will no longer be blocked, as the company is no longer providing the entertainment free, it is making a supply. It would account for output tax of £2ph but then claim £10ph as input tax (i.e. £60 × 1/6). It is important that this is a genuine charge, it cannot be a suggested amount or a donation – it has to be compulsory and collected and accounted for.

Gifts

Many companies will also make gifts to employees at Christmas time. In practice, there is no issue claiming a deduction for corporation tax purposes, but the income tax and VAT consequences must be considered.

If the value of the gift is no more than £50 (or £50ph on average, if it is provided to a group of employees), and it is not money or money’s worth (e.g. a cash voucher), it will probably qualify as a trivial benefit, so the company won’t need to report it, as long as it is not provided for in the employment contract and is not performance related. In short, it has to be a genuine non-cash gift. 

For VAT purposes, the problem is that the company has made a taxable supply to the employee, and so will need to account for output tax. It can also claim the input tax. However, if the value of all gifts to the same employee, in the twelve-month period ending with the date of the Christmas gift, does not exceed £50, there is no need to account for the output tax, while the input tax can still be recovered in full.

Get in Touch

If you have any questions regarding the tax implications of Christmas entertainment and/or Christmas gifts, please get in touch at: hello@dixcartuk.com

The UK is often perceived to have one of the most punitive inheritance tax regimes in the world. Generally, individuals pay a 40% rate on the value of their taxable estate above a tax-free allowance of £325,000. In the case of a married couple this tax-free allowance can be passed onto a surviving spouse, which means that, following their death, the estate will enjoy a £650,000 tax free allowance.

Additional Nil Rate Allowance

Individuals, with an estate value greater than their tax-free allowance of £325,000, due to the value of their home, may be able to take advantage of an additional tax-free allowance known as the residence nil rate band (RNRB).  This additional tax allowance is worth up to £175,000 (2023/24) and is available when an individual’s main residence is passed to their children or grandchildren.

People with large estates may not see any benefit from the residence nil rate band, as it will be reduced by £1 for every £2 that the deceased’s net estate exceeds £2M.

This means that there is no RNRB available if the deceased holds assets of more than £2.35M.

Reliefs such as Business Property Relief and Agricultural Property Relief are ignored when calculating the value of the estate.

Lifetime Gifts

If money is given away during an individual’s life it does not necessarily mean that the asset is, then outside his/her estate for inheritance tax purposes. This is the case when an asset is gifted away but the donor continues to benefit from the asset. An example would be – continuing to live in a property, even if the legal title has been gifted away (this is known as retaining a benefit).

Gifts, however, made more than seven years prior to death, without the retention of a benefit, will not be included in the deceased’s estate. Any gifts made within seven years will, in most circumstances, form part of the estate.

Business Property Relief APR (BPR) and Agricultural Property Relief (APR)

Business property relief (BPR) and agricultural property relief (APR) are IHT reliefs that may be available on the transfer of certain types of assets.  These two reliefs can often reduce the chargeable value of an asset by 50% or 100% and are extremely valuable tools for minimising the amount chargeable to IHT.

The rules are complex, and a detailed analysis is outside the scope of this article, however the main classes of assets that qualify are as follows: Business Property Relief

Assets eligible for 100% relief:

• A sole-trading business
• Partnership shares
• Shares in an unquoted trading company.

Assets eligible for 50% relief:

• Shares in a quoted trading company if the individual has voting control i.e. more than 50% ordinary (voting) shares
• Land, buildings and machinery that is owned by the individual and used in a business where the individual is a partner or a controlling shareholder.

Agricultural Property Relief

Assets that qualify for APR include:

• Agricultural land
• Woodland
• Farm buildings
• Farmhouses/cottages (if occupied for the purpose of agriculture).

Activities that are specifically exempt from qualifying for APR include:

• Land that is used for grazing horses
• Land used by livestock that is not farmed for human consumption
• Land that is used for sporting activities such as fishing and shooting

Gift Allowances

There are certain gift allowances that can be used year on year, where the seven-year rule is NOT applicable.

The six key gift options are detailed below. These options, if planned for properly across a number of years, can reduce the inheritance tax liability considerably.

Dixcart recommends that a record of all gifts made is kept with the Will.

Give away money each year

Each year an individual can give away up to £3,000. This gift can be to anybody or split across any number of people.

If this allowance is not used one year, it can be carried forward to give £6,000 the next year (it can only be carried forward one year).

Wedding presents

In addition to the annual allowance, parents can each give a wedding gift of up to £5,000 to their children. This gift allowance must be made before the ceremony.

If grandchildren marry, an individual can give up to £2,500 to each grandchild, and for friends or other relatives the wedding gift is up to £1,000 each.

Small gifts

Gifts of up to £250 per person each tax year are excluded from inheritance tax. Care needs to be taken, as anything over this sum could be classed as part of the £3,000 annual allowance. Individuals need to ensure that they have not used any other exemption for the recipient, or the allowance might not apply.

Charitable donations

Helping good causes with monthly donations can reduce the inheritance tax bill.

Charitable gifts are free from inheritance tax, if at least one-tenth of net wealth (calculated as a percentage of the death estate) is donated. The Government subsequently has the discretion to cut an individual’s inheritance tax rate from 40% to 36%.

Contributing to living costs

Money used to support an elderly person, an ex-spouse, and/or a child under the age of 18 or in full-time education, is not considered to be within the deceased’s estate on death, whatever amounts have been paid.

Payments from surplus income

An individual with surplus income should not ignore the opportunities provided by this provision. If the criteria, detailed below are met, the seven year period is not relevant. Such transfers are not deemed to be part of the taxable estate (except on death) and can therefore be exempt from inheritance tax.

The key criteria for a transfer of income to be exempt are:

• it was made as part of the usual expenditure of the transferor; and
• the transferor retains sufficient income to maintain his usual standard of living, having taken account of all the income transfers that form part of his usual expenditure.

Additional Information

If you require additional information regarding UK inheritance tax, gift allowances and/or the importance of having a UK Will, which reflects current wishes, please contact Paul Webb: advice.uk@dixcart.com or speak to your usual Dixcart contact.

What is Being Put in Place?

The objective is to tax profits based on the tax year instead of the profits for the 12 months to the accounting date in the tax year. The changes will take effect from the 2024/25 tax year, with transitional rules applying in 2023/24.

The reform affects individuals who are self-employed, including partners in trading partnerships, if their accounting periods are not aligned to the tax year (dates from 31 March to 5 April inclusive are treated as aligned to the tax year for this purpose).

Potential for Added Complexity

Although the changes have been positioned as a simplification, they can create complexity for the individuals and partnerships affected.

In principle the complexity can be avoided by aligning the business’s accounting period to the tax year, but in practice there are often commercial or international tax considerations that make this impractical.

HMRC have acknowledged that the changes will create additional administrative burdens for these taxpayers. HMRC consulted on ways to ease these burdens but confirmed that they would only implement very limited easement, which in practice is unlikely to provide much benefit to the taxpayers affected.

The Changes in More Detail

The current rules are known as the ‘current year basis’, where for income tax purposes, trading profits of a tax year are generally based on the profits for the 12 month accounting period ending in the tax year (subject to adjustments for disallowed expenditure, depreciation etc).

For example, if an individual compiles their accounts to 31 December every year, the 2022/23 taxable profits would be based on the accounts for the year ended 31 December 2022.

Special rules apply in the opening and closing years of a trading business under the current year basis but they are outside the scope of this note.

‘Tax Year Basis’ – the New Basis from 2024/25

From 2024/25, taxable profits for traders who’s accounting period is not aligned with the tax year, will be based on time-apportioned profits of the accounting periods that fall within the tax year. For example, if a trader draws their accounts to 31 December every year, their 2024/25 taxable profits would be based on 270/366ths of the 2024 calendar year profits and 95/365ths of the 2025 calendar year profits.

Whilst this is relatively simple on paper, it will cause difficulty in practice. The 2024/25 tax return is due by 31 January 2026. Unless the business is very simple, it is unlikely that the trader will be able to finalise the accounts and tax adjustments for the 2025 calendar year accounts in time. It is therefore necessary to file based on provisional figures and then revise the return later once the true figures for the later accounting period are known. This exercise would be repeated every year thereafter. 

Transitional Rules in 2023/24

For traders whose accounting periods are not aligned to the tax year, and who do not cease trading in the year, the profits in 2023/24 will be based on the period from the end of the 2022/23 basis period to 5 April 2024, with a deduction for any unrelieved overlap profits.

For example, if the trader draws their accounts to 31 December every year, the 2023/24 profits would be based on the whole of the 2023 calendar year accounts together with 96/366ths of the 2024 calendar year accounts, with a deduction for any unused overlap profits that arose in the opening years of trading. To the extent that this profit figure exceeds the profits for the first 12 months of the extended basis period, spreading provisions apply. These are called ’transition profits’. Transition profits are spread equally over five tax years, including 2023/24, but the trader can elect to be taxed on them sooner. Any untaxed transition profits are taxed automatically on cessation of the trade.

Anomalies that May be Created

• During the consultation process, many respondents noted that the acceleration of profits for five years would create anomalies for various allowances and tax charges that hinge on the individual’s level of income. The legislation included provisions that were intended to mitigate the impact by removing the transitional profits from the main tax computation and creating a standalone income tax charge. The provisions are effective in preventing some anomalies but not all.

• Losses may arise in the transitional year, if the unrelieved overlap profits exceed the profits for the extended basis period. To the extent that the loss has been generated by the overlap relief, extended loss reliefs may be available. The loss can be treated as a ’terminal loss’, which can be carried back and set against profits of the same trade in the previous three tax years. Other loss reliefs may also be available.

Interaction with Making Tax Digital for Income Tax

HMRC state that this reform is needed in order to implement Making Tax Digital for Income Tax (MTD). Under MTD, businesses will be required to send quarterly digital updates to HMRC, based on transactions in tax year quarters, and provide a digital ‘End of Period Statement’ to finalise the taxable profit for the tax year. For partnerships, this would include the allocation of the profits of the tax year to the relevant partners.

For most sole traders with turnover exceeding £50,000, MTD is mandated from 6 April 2026. This will be extended to sole traders with turnover exceeding £30,000 from 6 April 2027. The government is consulting on how the regime should apply to smaller businesses. Partnerships will be brought into MTD at a later undefined date.

Assistance and Additional Information

For assistance regarding the taxing of profits time-apportioned to the tax year or if you require any additional information, please contact Paul Webb at Dixcart UK: hello@dixcartuk.com

Background

The UK House of Commons Treasury Committee, has announced the release of a report on venture capital as well as recommendations to address issues with venture capital tax relief. Such  reliefs include; the Enterprise Investment Scheme (EIS), the Seed Enterprise Investment Scheme (SEIS), and Venture Capital Trusts (VCTs).

What Needs to be Addressed?

Issues which are reported as needing to  be addressed include a lack of diversity in venture capital, and regional variations  in the amount of venture capital investment. The majority of investments have been undertaken in London, Oxford, and Cambridge, the so-called ‘Golden Triangle’.

What are the Available Types of UK Venture Capital Relief?

Tax relief is available in the UK in the form of targeted reductions in tax liability.

Three forms of tax relief are available; the Enterprise Investment Scheme (EIS), the Seed Enterprise Investment Scheme (SEIS), and Venture Capital Trusts (VCTs). This sector also receives support via British Business Bank (BBB) funding schemes.

The reliefs are regarded as making a positive contribution to the venture capital market and investment in small, high-potential businesses in the UK. UK venture capital tax reliefs are considered to be globally competitive and are a key attraction for investors.

What are the Concerns?

The EIS and VCTs have statutory ‘sunset’ clauses that mean that they come to an end in April 2025. The Government has signalled an intention to extend the schemes but has not said when or for how long. This uncertainty could be a risk to investment.

However, the necessary renewal of the EIS and VCT schemes presents an opportunity for them to be  improved, to address current shortcomings. These chiefly comprise; diversity, regional inequality and scale-up capital.

Diversity

According to the report, diversity in the sector is unsatisfactory, both in terms of the characteristics of business founders that receive venture capital funding and the individuals who make venture capital funding decisions.

Further, the report highlights that women and individuals from ethnic minorities are highly underrepresented in both groups.

This is a limitation in this sector.

How Could Improvements be Made?

A number of suggestions have been made regarding improvements to counteract the current deficiencies regarding diversity.

These include:

• Venture capital firms be required to comply with the industry standard ‘Investing in Women Code’.

• The Government and BBB to consult on the creation of venture capital funds targeted towards women and ethnic minority founders, in the same way as the BBB’s regional fund programmes.

• The provision of statistics relating to diversity in staffing and funding decisions, to be a condition of receiving support in the form of the EIS and VCT tax reliefs.

Further Information

If you have any questions regarding the above, or require any assistance with the existing enterprise relief’s, please do not hesitate to contact Paul Webb: hello@dixcartuk.com.

Starting a new business is very time consuming, especially if the UK is new to you, with different rules and regulations. Dixcart UK can assist with your accounting, tax, legal and immigration requirements as one offering, so that you can focus your time on building your business and not having the same conversations twice with different professional advisors.

In this note, we consider the tax considerations when setting up a business in the UK.  There is no aspect of tax planning that is made better by delaying the discussions with your advisor until a later date. The maximum benefit will be enjoyed the earlier the planning takes place – so let’s chat: hello@dixcartuk.com

The opportunities to plan are not exhaustive but in this note we look to touch on some areas of planning that are often overlooked, but could easily have derived some tax savings, had the planning taken place as soon as possible.

Personal financing – Business Investment Relief and Inheritance Tax

Most businesses, start with someone having an idea or seeing an opportunity in a new market place. The business plan and concept often need proving and so personal financing is required. Raising monies, more broadly, is considered further below, but for an individual entrepreneur, who is resident but not domiciled in the UK, looking to invest monies into a new business, there is the option to claim Business Investment Relief (BIR) when investing into qualifying trading companies. 

• The full detail of the relief is outside the scope of this note but essentially foreign income and gains that are brought into the UK by UK resident non-domiciled individuals taxed on the remittance basis, will usually be subject to UK tax. However, where such income and gains are remitted to the UK by the individual to invest in qualifying companies, no tax charge will arise on those foreign income and gains, provided the conditions for BIR are met.

The benefit of course means that taxes are not immediately triggered, and in addition other non-taxable monies are preserved for personal expenditure.

• As well as this relief, another consideration individuals should have when setting up a UK business, is inheritance tax. Shares in a UK company will be considered to be a UK situs asset and therefore, if held personally, and subject to whether Business Property Relief might apply, could be subject to UK inheritance tax.  Dixcart UK are very experienced in planning for such matters and would be happy to discuss this further.

Other financing – Enterprise Investment Scheme

EIS fund raising is designed to help your company raise money to grow your business. It does this by offering tax reliefs to individual investors who buy new shares in your company.

Up to £5 million each year (£10m for Knowledge Intensive Companies), and a maximum of £12 million (£20m for Knowledge Intensive Companies) in your company’s lifetime, can be raised through the use of EIS. This includes amounts received from other venture capital schemes.

Comprehensive advice regarding the scheme rules will ensure that your investors claim and retain EIS tax reliefs relating to their shares. Dixcart UK can manage the whole process, from pre-approval to the issue of the EIS certificate.

More information on the opportunities available for businesses and investors can be found here: https://www.dixcartuk.com/seis-and-eis-the-opportunities-available-to-investors-and-fund-raisers-alike/

Corporation Tax

Corporation tax, like most taxes  in the UK, is complex and the detail cannot be explained in these short paragraphs.  We have therefore provided a summary of the rules and, as you will see, identified some areas of planning that are interesting for new businesses in particular.

When a new company is incorporated, HM Revenue and Customs will, in most cases, issue a tax reference number to the company at its registered office.

A company tax return, is filed by companies to report their income, profits and corporation tax figures to HMRC.

The company will need to file a company tax return once a year, but – unlike with self-assessment tax returns – there is not a universal deadline. Instead, the due date for your return will depend on your company’s accounting period and is typically due 12 months after that date.

Corporation tax is payable on profits for the same accounting period and the main rate is currently 25%. The deadline for payment is 9 months and 1 day after the end of the accounting period, although there are provisions in place for companies with large profits to make payments on a quarterly basis.

Unlike individuals, companies don’t receive any kind of tax-free allowance, and therefore all profits are taxable. However, there are a number of expenses and deductions that can be claimed to reduce your bill.

A Number of Corporation Tax planning opportunities

• Research and Development Tax Credits

New businesses very often invest in a range of research projects, as part of the start-up phase. This is of course a cash cost and puts pressure on a company’s cash flow. The UK rules offer the opportunity to receive money back from the tax authority!

R&D Tax Relief is a Government backed incentive designed to encourage innovation and increase spending on Research and Development activities, for companies operating in the UK.

For SMEs, a deduction of 230% of the amount spent on R&D can be made from taxable profits, reducing the corporation tax due. For loss making companies, the scheme allows up to 33.35% of a company’s R&D spend to be recovered as a cash repayment.

Claims are, however, often overlooked because; business owners over-estimate the level of innovation that is required in order to claim, do not know about the relief, or simply suspect that it is too good to be true!

Please visit our note for more information here: https://www.dixcartuk.com/our-services/tech-sector-specialists/rd-tax-credits/

• Losses

As is often the case with new businesses, the initial years can be difficult to gain market share and overcome the initial high expenditure. It is very common for businesses therefore to make a loss in the early years.

Relief may be available where you operate your business through a company and you make a loss. The loss may be set against total profits of the current or previous accounting periods or may be carried forward and set against future trading income from the same trade.

A trading loss is computed in the same way as a trading profit and normal rules apply. However, it should be noted that trading income does not include any chargeable gains, so chargeable gains are not taken into account when computing the loss.

• Capital Allowances

The UK gives tax relief for businesses in the form of a deduction against profit for expenditure on certain capital items.

Recent Budget announcements in 2023 mean that on top of the normal allowances business will now be able to claim:

• Full expensing – which gives 100% relief, in the year of expenditure, to companies on qualifying new main rate plant and machinery investments, from 1 April 2023 until 31 March 2026
• The 50% First-Year Allowance for expenditure by companies on new special rate (including long life) assets until 31 March 2026.

• Electric Vehicles

Business owners and employers who provide their employees with company vehicles before March 2025, can enjoy substantial tax benefits in the next few years, for making the switch to pure electric vehicles, in advance of the 2030 non-electric ban on new vehicles in the UK.

Please visit our website to read a case study on how these benefits can work: https://www.dixcartuk.com/dixcart-uk-can-advise-on-the-favourable-tax-treatment-available-to-employers-who-change-company-vehicles-to-electric/

Other tax considerations

Other than corporation tax considerations for a new business, Dixcart can also assist with; VAT planning and compliance as well as running compliant payrolls for companies to ensure that all of the appropriate tax obligations are met. 

Any business looking to start trading and employing people will have compliance requirements and failing to adhere to the rules can result in penalties. So let’s talk and get it right from the start!

How we can help you

Dixcart UK provides solutions and assistance to the business community in the UK and worldwide. 

We can:

• Assist with incorporating your business
• Assist with tax compliance and planning, including the aspects of UK tax covered in this note
• Offer bookkeeping, accounting and auditing services
• Offer employment and payroll advice and compliance
• Provide immigration advice, if you are looking to relocate yourself or staff to the UK
• Support all of the accounting and company secretarial activities of running a business
• Advise in relation to commercial legal matters including contractual matters and commercial property.

Further Information

For further information about Dixcart UK, please visit us at www.dixcartuk.com.

If you have any questions regarding the above, or require any assistance, please do not hesitate to contact Peter Robertson: hello@dixcartuk.com.

Background

In our sister article: Overseas investors thinking of investing in UK real estate Dixcart Legal set out some of the legal points that should be considered by overseas investors looking to invest in UK real estate. 

This article is designed to set out some of the main tax considerations for overseas investors in UK real estate but, as always, you should seek detailed tax and legal advice before entering into any transaction.

The UK tax position for non-residents (the position for UK residents is different) owning UK residential property is complex and will, to a certain extent, depend on how the property is purchased i.e. as an individual, through a company or trust.

Income tax

If a property is purchased by an individual or trust and rental income is received, then the income less any allowable expenses will be subject to UK income tax.

The rate of taxation payable will depend on the availability of any allowances, the level of rental profit and any other UK income earned by the investor, with tax rates starting at 20% and rising to up to 45%.

A UK income tax return will need to be filed by 31 January following the year of assessment i.e. UK tax year ended 5 April 2024, filing deadline 31 January 2025, and any tax payable will also be due on this date.  In certain situations, payment on account of tax may be due on 31 July and 31 January.

Corporation tax

If a property is purchased by a company (either UK or overseas) and rental income is received, then the income less any allowable expenses will be subject to UK corporation tax.

The rate of taxation payable will depend on the level of rental profit, with the UK’s corporation tax rate currently being 19% for profits under £50,000 rising to 25% for profits over £250,000.

A UK corporation tax return will need to be filed within 12 months of the year end to which the company makes up its accounts, and any corporation tax will be payable within 9 months and 1 day of the year end.

Please note that if it is intended that the owner of the company will live in the property there may be personal tax consequences for those individuals and advice should be sought in this respect.

Non-Resident Landlord Scheme

Where a UK property is owned and rented out by a non-resident then then there is a requirement for a 20% withholding tax to be deducted from the gross rent payable, with the withholding tax being paid to HMRC.  When the letting agent collects money from the tenant, this process should be completed by them but where it is a direct payment from the tenant it can become the tenant’s responsibility to deal with this payment to HMRC.

To avoid paying this withholding tax, the landlord must register with HMRC under the Non-UK Resident Landlord Scheme and apply to receive the rental income on a gross basis. 

Annual Tax on Enveloped Dwellings (ATED)

As the name suggests, ATED is a yearly tax and is payable by companies that own residential property in the United Kingdom having a value of more than £500,000.  An annual return is required to be made by 30 April each year to HMRC and the current ATED charges are:

Property value	Annual charge
More than £500,000 up to £1 million	£4,150
More than £1 million up to £2 million	£8,450
More than £2 million up to £5 million	£28,650
More than £5 million up to £10 million	£67,050
More than £10 million up to £20 million	£134,550
More than £20 million	£269,450

There are a number of exemptions from the ATED charge including:

• Letting to a third party on a commercial basis (so long as the occupant is not related to the owner.
• Where the property is used as part of the business of a property trading or developing.
• Where the property is being redeveloped or held as stock for resale by a property developer.
• Property held by trading companies for the use of employees in the trade.

Capital Gains Tax

Capital gains tax will be payable on any profits realised in relation to UK residential property.

For individuals and trusts, gains on the disposal of UK residential property will be taxable at up to 28%.

It may be possible to exempt the gain from tax if it was the owner’s, or a beneficiary of the trust’s, Principal Private Residence (PPR).

For non-residents:

• You must have spent at least 90 midnights in the UK property in a relevant tax year, or
• You must have spent at least 90 days in any other UK property that you own.

In order for the property to qualify as a PPR.

For companies, there is a corporation tax charge on gains on disposals of interests in UK land (including commercial and residential property), and on indirect disposals of UK land.  In relation to property disposals since 6th April 2019, companies need to register for corporation tax and may need to submit a corporation tax return to declare the disposal, and pay any tax due at the normal corporation tax rates of between 19% and 25%.  There is no PPR relief available for companies.

Stamp duty land tax

Subject to limited exemptions all non-residents now pay an additional 2% stamp duty land tax (SDLT) on residential property acquisitions compared to the standard SDLT rates.

The current standard residential rates are:

Property or lease premium or transfer value	SDLT rate
Up to £250,000	Zero
The next £675,000 (the portion from £250,001 to £925,000)	5%
The next £575,000 (the portion from £925,001 to £1.5 million)	10%
The remaining amount (the portion above £1.5 million)	12%

Higher Rates for Additional Properties

If the purchaser already owns another residential property, which can be located anywhere in the world, an additional 3% surcharge is added to the standard SDLT rates.

The purchaser can be exempted from this additional surcharge if the property being purchased is a replacement for their existing main residence.  It may, in certain circumstances, be possible to reclaim any surcharge paid, if the purchaser sells his/her previous main residence, within 3 years of the purchase of the UK property.

Rates for Company Purchasers

SDLT is charged at 15% on residential properties costing more than £500,000 bought by corporate bodies or ‘non-natural persons’. These include:

• companies
• partnerships, where one or more of the partners is a company
• collective investment schemes

The 15% rate does not apply to residential property bought by a company that is acting as a trustee of a settlement.

There are certain exemptions from this e.g. when the acquisition is made for letting purposes as part of a rental business or property trading or development business, but these should be considered carefully. 

Purchase of shares in a Company

Interestingly, SDLT is not payable if an individual purchases shares in a company owning UK property. Instead 0.5% stamp duty would be payable on the purchase price.

This can represent a significant saving, however, there are some possible drawbacks of investing in a company which holds UK property including; the ATED charge, possible inherent capital gains and certain other issues which may arise by purchasing a historical company. Detailed legal and taxation advice should be sought in this respect: hello@dixcartuk.com.

Inheritance Tax (IHT)

All residential property in the UK is potentially subject to UK IHT at 40%, irrespective of how it is owned.

In certain cases, an individual’s debts, such as borrowings secured against the property, may reduce the amount subject to inheritance, tax but care must be taken in this respect.

One relief available, is that transfers between spouses are normally free from UK IHT (subject to certain limitations when you pass the property to the surviving spouse, who is a non-UK domiciled individual).

Given that there is little planning available for UK IHT we often see clients taking insurance to cover any IHT liability associated with the property.

Additional Information

The taxation of overseas investors holding UK property is a complex topic. It is vital that advice is taken from a suitably qualified and experienced firm of professionals.

For additional information, please contact Paul Webb at Dixcart UK: hello@dixcartuk.com.