Read our recap of a conversation between Shojin CEO, Jatin Ondhia, and Alan Rajah, Partner at Lawrence Grant LLP, specialists in UK and international tax planning. Watch the Masterclass video of their discussion here.
During their discussion, Jatin and Alan provided key insights into tax considerations for both UK and non-UK residents investing with Shojin. They delve into the tax implications associated with investing through personal accounts as opposed to utilising UK-based limited companies. Additionally, the tax treatment of dividends for non-UK residents is explored, shedding light on the complexities of international investment. Investing from different countries come with their own specific challenges and laws, therefore seeking the advice of professionals is key to ensure that your tax is being optimised.
Depending on who is investing, the structure of the investment can vary in complexity. The simplest option is to do so as an individual, and to utilise one of the few gifts the tax man gives us: your ISA allowance. The annual ISA allowance for a UK residence is £20,000, and this can be allocated between a cash ISA, a stocks and shares ISA, an innovative finance ISA or a lifetime ISA. The majority of investment opportunities with Shojin fall under the innovative finance ISA category, this means that returns are tax free, and once your money is in that wrapper, you can keep recycling it to ensure tax-free returns accumulate.
In addition to ISAs, the Personal Allowance tax-free threshold of £12,570 can also be utilised, although this also includes income as well as returns from investments. Furthermore, if your income exceeds £112,000, then every pound over this amount will take one pound away from the Personal Allowance tax-free amount.
In addition to this, the capital gain tax allowance of £6,000 for an individual (a reduction from £12,300 in 2022-23), is something everyone in the UK should use. With the allowance scheduled to fall further to £3,000 from April, Alan states: "It’s an important time to make the most of the allowance before it lowers further." He also stresses the point that “the annual capital gain tax allowance is probably the lowest it's been since 1986”. For both personal and capital gain tax allowances, if you don’t fully utilise it then you aren't maximising your potential returns.
The income tax rate thresholds are currently: 20%, 40% and 45% across the following 2023/24 UK tax bands.
|Up to £12,570
|£12,571 to £50,270
|£50,271 to £125,140
Investing through a company structure
Savvy investors often use a company structure to invest in property, claiming 100% interest relief on property mortgages. This shields profits from personal tax, allowing reinvestment and flexibility. Corporate tax rates apply, providing options to retain or distribute funds through dividends. However, recent increases in dividend tax rates diminish the marginal benefit compared to salaries, impacting the tax advantage for individuals with family companies.
As long as the property is let on a commercial basis, there will not be an ‘annual tax in enveloped dwellings’ (ATED) charge, where properties are valued at over £500k. However, the company will still need to submit to HM Revenue and Customs an ATED return by 30th April of each relevant tax year.
Investing through a Trust
Another way to invest into properties is to set up an onshore trust. Families can set up a trust and use it as a means of investing in equities, bonds, or properties. Investing through a trust offers a range of advantages, primarily centred around estate planning, asset protection, and tax efficiency. Trusts can facilitate the seamless transfer of assets to beneficiaries by avoiding probate, ensuring a more efficient and private distribution process. Additionally, trusts provide a level of control over how and when assets are distributed, allowing for customization based on the grantor's preferences.
The asset protection aspect involves shielding assets from creditors and potential divorce claims, especially with certain types of trusts like irrevocable trusts. From a tax perspective, trusts can be instrumental in minimizing estate taxes and optimizing income tax outcomes. Privacy is enhanced as the terms and distribution details within a trust remain confidential, unlike publicly accessible wills.
The flexibility of trust structures allows for customization to suit individual needs, making them suitable for complex family situations or diverse asset portfolios. Trusts also ensure the continuity of asset management in the event of the grantor's incapacity or passing. Specialized trusts, such as those designed for charitable giving, education planning, and medical planning, further expand the range of options available to investors. Ultimately, investing with a trust requires careful consideration and professional guidance to align with specific financial goals and estate planning needs. It's crucial to work with legal and tax professionals when considering the use of trusts for tax planning in the UK. The effectiveness of a trust in achieving tax efficiency depends on various factors, including the type of trust, the assets involved, and changes in tax legislation.
SSAS and SIPP
There are two different types of schemes regulated by the pension authority, and each of them have different use cases and benefits. A Small Self-Administered Scheme (SSAS) is typically established by a small group, often employees of the same company, providing collective control over investments with members acting as trustees. SSAS offers flexibility in investments, including commercial property (not residential), also unlisted bonds and shares (through platforms such as Shojin). On the other hand, a Self-Invested Personal Pension (SIPP) is an individual pension plan allowing the plan holder to manage their investments within the pension framework. SIPPs offer a diverse range of investment options but lack the collective control seen in SSAS. While SSAS involves active member participation in administration, SIPPs are more streamlined, with the plan holder handling day-to-day decisions. The choice between SSAS and SIPP depends on factors such as collective control preferences, investment objectives, and administrative involvement.
According to Alan: “To have a SSAS, you have to have an employer to set it up,” resulting in more people who are employees having a SASS and typically more entrepreneurs or people who have their own business having a SIPP. There is typically more regulation around a SIPP than a SASS. In terms of tax relief through a SASS or SIPP, Alan goes on to say: “any funds going to a pension scheme will attract tax relief up to maximum of 45%, which is great if you want to do try to reduce your tax bill on a personal level. Any income earned by the SSAS or SIPP, does not attract any tax on income, and if the SSAS or SIPP sells a property or an asset, there's no capital gains tax at all.”
Shojin is home to investors from over 50 countries, with a significant number coming from the East Asia. Sharing the options available for overseas investors to efficiently invest their money is a key aim of ours. These include: through a trust (typically offshore), through an offshore company or through a UK company. Investing through an offshore company comes with more compliance criteria than if investing through a UK company. The UK has recently set-up a registration service for overseas investment, with foreign investors registering their investments in a host country to comply with local regulations. The main forms of tax overseas investors are subject to are: income tax, capital gains tax and inheritance tax.
Alan estimates that £500k is the floor for an overseas investor to justify the time it takes to go through the rigmarole of using any of these options to invest. Buying property in the UK through a company could potentially bring up additional taxes if the property is worth over £500k+. When it comes to investing in the UK and ensuing you aren’t getting double taxed or being subject to inheritance tax or any other potential issues that might occur, it is important to talk to a professional tax advisor.
Stamp Duty Land Tax (SDLT)
A sensible way to view stamp duty is as a stealth tax for property purchases in the UK. The NIL rate band increased from £125k to £350k for all residential properties in England and N Ireland, and the NIL rate band for 1st time buyers has increased from £300k to £425k. First Time Buyers’ Relief also increased from £500k to £625k. These SDLT reductions remain in place until 31st March 2025.
SDLT rates on residential property:
|Up to £250k
|£250,001 to £925,000
|£925,001 to £1.5m
SDLT rates on second home:
|Up to £250k
|£250,001 to £925,000
|£925,001 to £1.5m
Different rates apply to different properties depending on their value, and when buying a second home all these rates increase by 3%. Commercial properties have a different rate to this, they have a slab rate (which can be seen in the table below)
There is also an additional 3% surcharge on stamp duty where residential properties are purchased via companies.
SDLT rates on commercial property
|Up to £150k
|The next £100k
(The portion from £150,001 to £250,000)
|The remaining amount
(The portion above £250k)
Most people plan to buy their commercial properties through pensions, or through hybrid systems where the pension can fund the initial purchase of the property, and then the balance can be funded by taking a mortgage. This would mean that the pension company could own part of the commercial property on your behalf.
Inheritance tax is a topic which many can find frustrating, especially overseas investors. The IHT Nil Rate Band is the threshold up to which an estate is exempt from Inheritance Tax, the standard Nil Rate Band in the UK is £325,000. Estates valued below this threshold are not subject to Inheritance Tax. This can be multiplied by two when a spouse is factored in.
The Residence Nil Rate Band (RNRB) is an additional allowance that can be claimed when a person's main residence is passed on to direct descendants, such as children or grandchildren. The RNRB is set at £175,000 per person. This allowance is added to the standard Nil Rate Band, providing potential tax relief for those leaving their main residence to qualifying descendants.
There isn't a specific "lifetime rate" associated with Inheritance Tax. However, individuals are allowed to make certain gifts during their lifetime, and these gifts may be subject to Inheritance Tax. Lifetime gifts that exceed the annual gift exemption and other allowances may be subject to tax, but there is usually a seven-year rule. If the donor survives for seven years after making the gift, it becomes exempt from Inheritance Tax.
Where the value of property exceeds £650k and it is gifted into a trust, then the excess above £650k will be subject to 20% IHT but the trustees will have 10 years to make this tax payment, which is better than the standard 40% tax.