If you’re a South African considering a UK property purchase to earn a foreign income, you might be wondering whether it’s more tax efficient or otherwise advisable to do this through a limited company structure instead of your own name.

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The short answer is: it depends. Whether you purchase a UK property as an individual or as a limited company, there are benefits and potential pitfalls based on your personal situation and goals.

Individual tax as a non-resident landlord

UK-resident landlords must declare their rental income in their annual Self Assessment and then, if it's required, pay tax. 

Non-resident landlords, however, should have their tax deducted automatically by managing agents or tenants, unless they register with HMRC’s Non-Resident Landlord Scheme to receive rental income gross. In this case, they will need to declare and pay tax on it as part of an annual tax return.

As an individual earning a UK-sourced income, you would need to file a tax return with HMRC every year. This tax return must be filed even if you’re not making a profit or owe no UK tax. The tax year runs from 6 April to 5 April and the return for that period must be filed and paid by 31 January of the following year.

Double Taxation Agreements

South Africa has a DTA (Double Taxation Agreement) with the UK, which prevents South African residents from being subject to tax in both countries on the same income.

As a result of this DTA, you are entitled to a tax-free personal allowance (currently £12,500 per year) on your individual UK income. This means that if you earn less than that, you don’t need to pay tax in the UK. However, your rental income must be added to your South African taxable income and you will likely have to pay tax on it in SA when you submit your return to SARS.

If you earn over the UK’s personal allowance, you will need to pay tax on the remainder to HMRC. That amount can then be deducted from your SA tax as a tax credit.

In both cases, your income will be taxed. However, the amount of tax you pay might be different depending on whether you pay it in the UK or in SA, because the countries have different tax brackets.

Cross-border tax matters are complex. Our South African tax division can help.

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Deductible expenses

Your taxable rental income is your income minus “wholly and exclusive” expenses relating to your property. This includes things like utilities, council tax charges, repairs and maintenance.

Improvements on the property are not tax deductible. Interest on your mortgage is also not 100% deductible. However, you are entitled to basic tax relief (which is currently 20%) on the mortgage interest.

Capital Gains Tax when selling your UK property

If you decide to sell your property, you will need to report this sale to HMRC, even if there is no Capital Gains Tax (CGT) liability.

You will need to set up a Capital Gains Tax on UK Property account and, within 60 days of sale completion, you will need to inform HMRC of all the details needed to determine your capital gain. From that amount, you can deduct the CGT relief of £12,300 (set to change to £6,000 in 2023 and then to £3,000 in 2024) and calculate the amount of capital gain tax owed, which needs to be paid within the 60-day period.

UK buy-to-let through a limited company

One of the main benefits of owning your property through a company is that you can claim interest on a mortgage as an expense. This is partly why the total number of companies set up to hold buy-to-let property (sometimes called “special purpose vehicles”) has doubled since 2017, when this stopped being possible for individuals.

The challenges of setting up a UK limited company

Limited company setup in the UK is relatively easy and can take as little as three to five days. You don’t need to be a UK resident to be a director or a shareholder. However, you do need to have a registered office address in England, which will be listed on the Companies House website and will be available to be viewed by the general public (this is something that we can help our clients with).

The tricky part is that you will need to have a UK bank account. Many banks, whether high street or online, want someone within the company to be based in the UK. While there are banks that allow non-residents to open accounts, this is a complex process as there are a number of compliance hoops to jump through and it can take a few months to get set up. If you are planning to set up a limited company in the UK, you should start the process of opening your bank account as soon as possible to avoid delays further down the line.

Corporation tax as a non-resident landlord

Operating as a company in the UK comes with a number of compliance requirements. A UK company has to file financial statements and pay corporation tax to HMRC every year. You also need to file a confirmation statement at Companies House ever year (which is akin to re-registering your company annually).

Our accounting team can assist with preparation and filing of all statutory returns and financial accounts.

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UK companies pay tax at 19%, regardless of how high or how low the profit is. Unlike personal tax, there are no allowances. So, from the first Pounds you earn as a profit, you will pay 19%.

Dividends and retained earnings

When an individual landlord makes rental income, that money is immediately considered part of your personal earnings. However, companies can retain earnings. In simple terms, this means that the money stays within the company and can be allocated to shareholders, reinvested or even inherited as part of the company at a later stage.

You can decide when to withdraw your earnings as dividends and will only need to pay personal tax on those dividends at that point. You can earn some dividend income each year without paying tax on it. Currently this allowance is £2,000, but it is set to drop to £1,000 in 2023, and then to £500 in 2024.

Tax when disposing of the property

Capital gains within a company is considered company income and is paid at the flat corporate tax rate of 19%. As a result, it’s much easier to work out your capital gains than when you sell your property as an individual: Once the capital gain has been calculated, taking into account expenses that can be deducted, the tax on the final gain will be calculated at 19%.

Limited company setup made easy

If you do choose to set up a limited company in the UK, our specialised accountants can assist you with the incorporation and, once that is completed, can provide you with all the necessary documents, including a Certificate of Incorporation, Memorandum and Articles of Association.

Give us a call on +44 (0) 20 7759 7530 or drop us an email and we’ll be happy to chat about your options.

Stamp duty as a non-resident

As of April 2021, non-UK residents buying residential property in England and Northern Ireland need to pay an extra 2% of the property purchase price in Stamp Duty Land Tax. This amount is added to all ordinary residential rates (such as increased rates for owning multiple properties).

Even if you purchase a property through a company that’s registered in the UK, the fact that you are non-resident means you will be liable for this charge.

However, something interesting to note if you intend to emigrate in the near future, is that if you become UK tax resident within two years of purchasing the property, you will be able to file for a refund on this surcharge.

What about putting the property in a trust?

While trusts are a popular vehicle in South Africa, they’re less popular in the UK. The main reason we’d recommend using a limited company over a trust is that the more complicated your company structure (for example, where shareholders are trusts), the more difficult it is to set up a bank account in the UK and to apply for mortgages.

It’s worth speaking to a cross-border financial adviser for advice on which option would be preferable, or if there are more tax-efficient wrappers available for your particular circumstances.

Should you set up a limited company for purchasing UK property?

Our belief is that if you plan to only purchase a single property, it's simpler to do so as an individual.

  • You do not need to incorporate as a company and try to get a UK bank account.
  • It might be easier to get a mortgage.
  • There are a number of tax reliefs that you can get as an individual, depending on where you're from and Double Taxation Agreements.
  • You only need to file a Self Assessment, compared to company accounts.

However, if you plan to invest in multiple properties, it might be worth going through the extra trouble to save on tax in the long run.

  • As a company, you can claim full mortgage interest against your profits.
  • You can retain profits within the company and do not have to allocate the profits out to the shareholders.
  • The corporation tax might be lower than what you’d end up paying as an individual.

Ultimately, it comes down to your individual circumstances, what UK property you're seeking to buy, how you're looking at financing that, and also what your long-term plan is.

Looking at a UK property purchase? Our offshore real estate team is here to help. Using the combined expertise within Sable International, we can guide you through every step of the process, including mortgages, accounting and tax matters.

Read more about our investor journey here or get in touch at rei@sableinternational.com or +27 (0) 21 657 1535

Or, if you’d like more advice about setting up a UK company, feel free to get in touch with our accounting division directly on accounting@sableinternational.com or +44 (0) 20 7759 7553.

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