New UK property taxes threaten to take a toll on investors in the UAE

Sweeping UK property tax changes being introduced next month could leave UAE investors out of pocket.

From April 6, the UK government will put in place a new set of tax changes likely to make it more expensive for many international investors to rent out homes in England and Wales.

Under the new rules, scores of UAE-based investors who own high-value homes in London through offshore companies, will be subject to inheritance tax when they die.

And at the same time, anyone renting out residential property in the UK will be hit by a restriction on the amount of higher rate tax relief they can offset against mortgage interest.

Lawyers and tax advisers in the UAE say that they are seeing a rush of customers seeking advice as the April deadline looms.

“We have seen an extra rush in interest because of the new inheritance tax changes coming into force next month,” said Youssef Boulos, a partner at Trowers & Hamlins law firm in Abu Dhabi.

“A lot of our clients purchased high-value residential properties in London as a long-term family investment and decided to hold it in a corporate structure which had the benefit of not being subject to inheritance tax. Now they are having to look at changing the ownership structure of the company or, especially for private use properties, at taking the property out of that corporate structure and putting it in personal names, which can be costly in itself.”

Under the legislation, the UK tax authority will from April be able to “see through” any overseas corporate structures used by Middle East investors to hold their property assets, meaning their owners will be subject to a 40 per cent inheritance tax.

“There appears to be little awareness among investors for this imminent change in legislation and could result in beneficiaries being hit with an unexpected tax bill,” said David Denton, international technical sales manager at Old Mutual Wealth.

“UK inheritance tax is charged at 40 per cent, so it is important that investors take professional advice to ensure adequate provisions are in place and funds are available to their beneficiaries to pay any future tax liability.”

Another sweeping change that the Residential Landlords Association has warned will make the UK “one of the most hostile tax regimes in the western world” will involve landlords no longer being taxed on the profit they make, but on their entire income.

It means that UK landlords will start losing the right to claim back their mortgage interest costs at the rate they pay income tax – currently up to 45 per cent. Instead this will drop over the next three years and be replaced with a 20 per cent tax credit.

The new rules are the latest in a series of government attacks on the UK’s buy-to-let sector, which policymakers fear is preventing young people from affording their own homes and leading to a Generation Rent in high value areas such as London and the South-East.

According to a survey of 127 Gulf-based high net worth individuals by Cluttons in December, London remained the most popular overseas destination in which to buy property, followed by New York and Singapore.

Last year the former chancellor George Osborne introduced a 3 per cent stamp duty tax surcharge on buy-to-let and second homes. And in January the Bank of England introduced new affordability checks and interest rate stress tests requiring lending banks to verify that landlords can afford to pay the mortgage under potential future interest rates of 5.5 per cent. It also recommended that rental income cover 125 per cent of mortgage payments.

Chris Battle, a commercial manager at a Dubai construction company with a portfolio of five investment properties across the UK which he rents out, said although the rule changes will complicate matters, he is still planning further UK property purchases this year.

“I know a number of people who structured their property through a corporate structure to avoid inheritance tax and are now having to look at changing back,” said Mr Battle, who heads up the Property Hub Meetup group in Dubai, inspired by the UK podcast “I think most of these changes could be very positive for good landlords. If landlords are making such a small margin that they are going to start losing money after these changes, then they probably shouldn’t be leasing out property in the first place. If some of the more highly geared landlords drop out of the market then there could be a shortage of rental property.”

However, Richard Bradstock, a Middle East director at IPG Global, which advises investors on purchasing property, said the tax changes may have a limited effect on his UAE-based expatriate clients.

“The new rules only impact people who have more than £44,000 [Dh198,710] in taxable income from the UK,” he said. “Most of our landlords have a rental income worth less than this. These new measures are more likely to affect landlords based in the UK who also have a taxable UK salary.”

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