Challenges ahead for IOM based UK property investors
Challenges ahead for IOM based UK property investors
By Peter Sharkey
If you’re an Isle of Man resident, you may believe that your personal affairs, taxation matters and investments are beyond the reach of the British state, but as we go to print, draft legislation scheduled to be published by the UK government should make you think again.
Following a period of nominal ‘consultation’, the UK government has confirmed that non-UK resident company landlords, as well as the non-resident capital gains tax charge will, from 6 April 2020, come within the scope of existing corporation tax law.
The UK government is also consultingon proposals to tax gains made by non-residents on UK immoveable properties. This, however, is a foregone conclusion as the proposals are due to take effect from April 2019. Under the new rules, a charge for gains made upon on the disposal of commercial property will be introduced, while the current rules relating to residential property will be extended, taxing non-residents on gains arising from the sale of shares in a property-rich company.
Where once there were distinct tax advantages to being based outside of the UK vis-à-vis real estate, owning UK property is no longer a tax efficient option for most Isle of Man residents. In the case of residential property, Manx owners of UK investment propertyare already subject to the full panoply of property-related taxes: from corporation (or income) tax on trading profits and, where applicable, capital gains tax upon disposal, to inheritance tax upon death.
Clearly, HMRC no longer considers extra-territoriality as a form of barrier as they set about their task of collecting taxes for the UK exchequer. The question is: where will it end?
UK stamp duty, payable by almost all property purchasers, is an incredibly profitable tax which is easy to collect (buyers are fined if it’s not paid within 30 days), simple to adjust and can be targeted with the minimum of fuss.
Up until April 2011, the maximum duty payable was 4%; the Finance Act 2010 introduced a 5% rate for purchases over £1 million, although this was increased to 7% within 12 months.
The 2012 Finance Act introduced a 15% flat rate on companies buying residential property worth £2 million or more; within two years, the threshold was reduced to £500,000.
Duty was raised again in 2016, when a spiteful 3% supplementary rate was also introduced, targeted at individuals, most of whom are private landlords, acquiring an additional residential property.
No wonder Treasury receipts from stamp duty rose by more than 44% between 2006 and 2016, soaring from £7.4 billion to 10.7 billion. This figure had grown by a further £1 billion within 12 months and is scheduled to continue rising.
In March, the UK’s Office for Budget Responsibility revealed that it expects stamp duty receipts to reach £17 billion by 2021-22, an increase of 45% in the space of three tax years. No prizes for guessing where HMRC will focus their attention as they seek to capture an additional £5.3 billion in stamp duty: property owners based outside of the UK are not only an easy target, the government can bank upon widespread public support if they’re seen to be taxing non-residents at rates in excess of those levied on domestic property buyers.
At this juncture, there’s no indication that non-UK residents will be targeted, but that extra £5.3 billion has to come from somewhere and while a proportion will accrue as property values increase, it’s extremely unlikely they’ll rise at a constant 15% a year.
The UK’s property tax shenanigans have not only deterred would-be Manx investors from buying mainland real estate, it’s turned their attention towards the domestic market.
Consider the following example: acquiring a buy-to-let investment in the UK at a cost of £375,000 would create an eye-watering stamp duty liability of £20,000. Buying a similarly-priced property in the Isle of Man with the intention of letting it to tenants would result in a local registration fee of £2,156.
If we assume a conservative gross rental yield of 4.5% on each property, the difference in charges between the two countries (£17,844) would effectively wipe out more than a whole year’s rent generated on the one in the UK (£16,875), a less-than-perfect situation for investors liable for mortgage and insurance payments.
In fact, not only are up-front domestic property acquisition charges more than nine times lower than the UK, gross rental rates are actually a shade higher than the example given above. As the Island’s rental market continues to experience stock shortages, competition between tenants has pushed yields upwards, making the case for investing in property even more compelling.
James Greenhalgh, managing director of Douglas-based Hartford Homes, believes that investors can continue to benefit from “the Island’s consistently strong rental growth.” Mr Greenhalgh says that, not surprisingly, demand for his firm’s pre-let properties, yielding close to 5% per annum, has remained “steady throughout the year as prospects of an interest rate rise recede.”
The comment is true for both tenants and landlords as both parties enjoy all of the benefits of a newly-constructed property.
As more new UK taxes act as a disincentive for would-be, Island-based property investors, the answer to their understandable enthusiasm to acquire assets yielding ten times more than the average savings account may lie right under their nose.
For details of our current investment properties, please visit http://www.hartford.im/investment
To discuss your specific requirements, please contact us on +44 (0) 1624 631000, or see our contact details on this website.
Peter Sharkey writes regularly for Hartford Homes. © Sharks Media Ltd
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