Property Holding Structures - Investing in UK Property

Overseas investors looking to invest in UK property in a tax efficient manner need to have a basic knowledge of how the UK tax system works in respect of property investment.

A UK resident company, for example a company incorporated in England and Wales, is chargeable to UK corporation tax on all of its worldwide income and capital gains from property.

Whereas, a non UK resident company such as an Isle of Man company, is only chargeable to UK corporation tax on income or capital gains from UK property if it trades in the UK through a permanent establishment situated in the UK.

A permanent establishment is:

  • a fixed place of business in the UK through which the business of the company is carried on; or
  • an agent in the UK acting on behalf of the non resident company which habitually exercises authority to do business on the company's behalf.

A fixed place of business includes (but is not limited to):

  • a branch
  • an office
  • a place of management
  • a factory
  • a workshop
  • a building site or construction or installation project

If a non resident company such as an Isle of Man company, does not have a permanent establishment in the UK then the company is chargeable to income tax at the basic rate (20% for 2010/11) on all of its income from UK property.

Subject to specific anti avoidance provisions, the capital gains of non UK resident companies without a UK permanent establishment are generally outside the scope of UK taxation.

UK Investment Property Structure

The typical Isle of Man structure for holding UK investment property by an overseas investor is shown in the diagram below.

In the example the property company is taxed in the UK on the rental income at the rate of 20%. Interest payable on the loans to finance the acquisition of the property can, subject to certain requirements, be set off against the rental income.

Isle of Man companies are only chargeable to UK corporation tax on chargeable gains on assets used in a trade that is carried on through a UK permanent establishment. In this example as the Isle of Man property company holds the property for investment purposes and does not carry on a trade through a UK permanent establishment no UK tax arises in the IOM property company on the disposal of the property.

As the Isle of Man holding company does not carry on a trade through a UK permanent establishment it is not within the charge to UK corporation tax. No UK tax will arise if the holding company disposes of its shares in the IOM property company.

A popular form of company is the Isle of Man 2006 Act Company which is a modern user friendly form of company (a fact sheet on the 2006 Act Company can be accessed through this link).

Non Resident Landlord Scheme

Rental income received by an Isle of Man company from UK property will be subject to withholding tax under the Non-Resident Landlords scheme. The basic rate of income tax will either be withheld by the letting agent or the tenant from the rent paid to the non resident landlord or the non resident landlord can apply for permission to receive the rental income without deduction of tax. In the case where the UK rental income is paid gross the non resident landlord will pay the UK income tax under the UK income tax self assessment system.

Our administrators can assist with registering the company under the Non Resident Landlord Scheme and the ongoing administration of the company.

Value Added Tax (“VAT”)

The Isle of Man has its own Customs & Excise service which is a Division of the Isle of Man Government's Treasury.

The standard rate of VAT is currently 17.5%.

The Island's relationship with the UK is governed by Protocol 3 to the UK's Act of Accession and the Island is part of the customs territory of the European Community. The Isle of Man is not regarded as a third country for customs purposes. Community legislation in customs matters applies directly with a few minor exceptions.

Although Community legislation in VAT and excise matters does not directly apply in the Island, the provisions of the relevant Directives are given legal effect through Manx legislation and therefore the Island is treated as if it were part of the fiscal territory of the Community.

The VAT Directive and the 1992 Directive on the holding and movement of excise goods both recognize the Island's status in relation to the fiscal territory. These Directives instruct other Member States to treat transactions involving Isle of Man businesses as if the transactions originated in, or were intended for, the UK. This means that the Island may be treated as if part of the Single Market for trade in goods.

Isle of Man Customs and Excise aims to register new traders within 7 days of application, provided all the relevant information has been provided.