U S L A W www.uslaw.org FALL/WINTER 2013

This article is intended to assist U.S. cit-izens, and their advisors, when consideringwhether to purchase property in the UK, ei-ther as an investment or home, or to usewhen visiting or working in the UK.

THE LONDON PROPERTY MARKET The London property market is thriv-ing and continues to go from strength tostrength. Indeed, properties in the UK haveseen an increase in value in the most recentpublished figures. Activity in the UK marketis forecast to carry on growing. London is a world-class city and has agreat reputation as a global financial centre.It is an attractive and popular choice forthose who wish to invest in property andparticularly for those based abroad andwanting a base in Europe. Property pricescontinue to rise, particularly in London, de-spite the economic difficulties. A purchasein London is seen as a safe investment thatwill bring a healthy return. Despite an in-crease in the prices being paid, the yield re-mains very good and appealing. The majority of property purchases in

Central London are by overseas purchasers.Developments such as One Hyde Park andThe Knightsbridge have helped ensure thatthe interest in London is kept alive. Foreign investors are particularly inter-ested in areas such as Knightsbridge,Mayfair, Belgravia and St John’s Wood. Therest of London also benefits from this inter-est as property values continue to risethroughout the area.

FORMS OF OWNERSHIP This article assumes that the U.S. citi-zen will purchase the UK property in hisown name, or jointly with his spouse or civilpartner (the term “spouse” hereafter refersto either). If spouses decide to purchase jointly,they should hold as “tenants in common,” aform of co-ownership that allows them topass their respective shares on death by Willand provides the greatest scope for UK taxplanning. However, if one spouse is a non-U.S. citizen, purchasing in their sole namemay avoid U.S. tax on the rental income.Coordinated U.S. advice should be taken as

there may be gift tax points to consider.

TAX ISSUESIncome Tax U.S. citizens purchasing a property asan investment will be liable to UK incometax on the rental income. For tax year2013/14, the rates are 20% on the first£32,010 (after any applicable reliefs andpersonal allowances), 40% on the remain-der up to £150,000 and 45% on the surplus.Under the Non-Resident Landlord Scheme,income tax at 20% is effectively withheldfrom the rent by the UK letting agent (ifany) or by the tenant unless the landlord ac-tively opts out. U.S. citizens purchasing a property forpersonal use should take advice on whethertheir proposed use of the property willmake them UK resident for tax purposes.Under the UK statutory residence test, daysof physical presence in the UK count to-wards UK residence, as can an individual’s“connections” to the UK, of which UK ac-commodation can be one. If the residencetest applies, the worldwide income of the

BUYING OR RENTING PROPERTY IN THE UK?The real estate, tax and estate planning issues

that a U.S. citizen needs to know.Emma Loveday and Parminder Sidhu Wedlake Bell LLP

U S L A W www.uslaw.org FALL/WINTER 2013

U.S. citizen could be subject to UK tax. The2003 UK/U.S. treaty should provide relieffor any element of double taxation but aUK/U.S. accountant should be involved.

Capital Gains Tax UK capital gains tax (“CGT”) mayapply when a U.S. citizen sells a UK prop-erty if a gain is made over the acquisitioncost of the property. The rate of CGT is cur-rently 28%. However, CGT only applies ifthe individual is a UK resident in the taxyear of sale or, has been a UK resident andsells when a non-resident, and returns tothe UK within five tax years. Up to 100% re-lief can be claimed if the UK property is theindividual’s only or main residence.

Stamp Duty Land Tax (SDLT) SDLT is a mandatory tax to which abuyer is liable when buying a property inthe UK (regardless of residence status). Therate of SDLT varies according to the pur-chase price with the maximum rate of 7%applying to properties worth over £2m.

Inheritance Tax UK inheritance tax (“IHT”) will applyif a U.S. citizen dies whilst holding a UKproperty or if he makes a gift of it during hislifetime. The rate on death is 40% onchargeable transfers in excess of £325,000(a threshold known as the “nil-rate band”).Transfers between spouses are generally ex-empt but a restriction applies if the recipi-ent spouse is non-UK domiciled, in whichcase the exemption is limited to £325,000. The UK IHT regime is usually the maindrawback for U.S. citizens purchasing UKproperty but mitigation planning is dis-cussed below.

ESTATE PLANNINGWills It is important that a U.S. citizen makesa Will to deal with the succession to a UKproperty on death. The property will other-wise pass in accordance with the UK IntestacyRules according to a fixed order of priority. Having a Will also allows the U.S. citi-zen to include provisions to ensure theproperty passes efficiently from an IHTplanning and U.S. estate tax perspective. The UK Will may need to include a“credit shelter trust,” benefitting the spouseand any children, into which an amountequivalent to the estate tax applicable exclu-sion credit (a maximum of $5,250,000 for2013) should pass. Whether this is to be in-cluded will depend on the terms of any U.S.(or other) Will and the value of the U.S. cit-izen’s estate, and legal advice on UK andU.S. Wills should be coordinated (not least

to ensure that one does not revoke theother). Either way, an equivalent provisionto make use of the IHT nil-rate band shouldbe included or carved out of the credit shel-ter trust as necessary. Any remainder of theUK estate should pass to the survivingspouse in a form that qualifies for the estatetax marital deduction and IHT spouse ex-emption (subject to the restriction for non-UK domiciles referred to above). Thisstructure ensures that IHT and estate taxare deferred until the survivor’s death. Ifthe surviving spouse is not a U.S. citizen, themarital deduction will only apply if a quali-fied domestic trust (a “QDOT”) is used forthe survivor’s interest, and the UK Will mustbe drafted so as to comply with the require-ments for a valid QDOT.

Further IHT planning Using a mortgage can be an efficientway to minimise an IHT liability as any bor-rowing on the property should be de-ductible from the property’s value for IHTpurposes. Co-ownership will avoid IHT ifthe value of each person’s share falls underthe nil-rate band but each co-owner mustuse or occupy the property in proportion totheir share of the property. Otherwise, lifeinsurance could be considered and a policypurchased to cover the estimated IHT lia-bility on death.

CONVEYANCING PROCESS The conveyancing procedure inEngland can be broken down into two ele-ments, namely exchange of contracts and com-pletion. The main steps are:1. After a price is agreed, the seller and

buyer will instruct separate lawyers.

2. The seller’s lawyers will draft the contractand compile documents relating to theproperty. Title to land in England andWales is guaranteed by the state, and reg-istered at the Land Registry.

3. The buyer should instruct a surveyor toinvestigate the physical aspects of theproperty. The cost is around £1,500 plusVAT (a sales tax levied at 20%).

4. The buyer’s lawyer will undertake duediligence including carrying out a num-ber of standard searches, namely:

• Local Authority Search. This is submit-ted to the Local Authority and dealswith information relating to authorizedalterations and works carried out at theproperty.

• Drainage Search. This will confirm de-tails of the water and drainage facilities.

• Environmental Search. This identifiesany possible environmental issues, in-

cluding problems with past land use orcontamination.

• Planning Search. This advises of neigh-borhood statistics and of any new devel-opments or applications relating to thesurrounding area.

• Chancel Repair Liability Search.Although uncommon, there remainproperties affected by chancel repair li-abilities. The liabilities often date backto medieval times, when the parishchurch was granted powers to chargerectorial properties for the upkeep ofits chancel.

The buyer’s lawyer will deal with any is-sues and raise enquiries with the seller’slawyer, if necessary.

5. When all enquiries have been dealt with,and the search results are received, thebuyer’s lawyer will advise the buyer to pro-ceed to exchange of contracts. Until ex-change, it is open to either party towithdraw from the transaction, or rene-gotiate the price.

6. On exchange, the contract signed by thebuyer is exchanged for the contractsigned by the seller, and normally a 10 percent deposit is paid. The sale is now legallybinding and a completion date is fixed.

7. Between exchange and completion, thereare various formalities to deal with, in-cluding signing documents and calculat-ing funds required to complete.

8. On completion, the balance of the pur-chase price is paid, along with any othersums due, and the keys are handed over.Following completion, SDLT is paid andthe buyer registered as the new owner.

Emma Loveday is a partnerand Parminder Sidhu is aSenior Associate solicitor inTELFA UK member firmWedlake Bell LLP. Emmaspecialises in UK tax, trustand estate planning.Parminder is in the residen-tial property departmentand advises on residentialproperty and residential de-velopments. They can bereached at eloveday@wedlakebell.com and psidhu@wedlakebell.com

Wedlake Bell LLP52 Bedford Row • London WC1R 4LRwww.wedlakebell.com