The United Kingdom of Great Britain and Northern Ireland is a sovereign state in northern Europe which includes England, Wales, Scotland and Northern Ireland. It is governed under a constitutional monarchy and a democratic parliamentary system made up of two houses; an elected House of Commons and an appointed House of Lords. It has a population of more than 62 million and has the world's seventh-largest economy by nominal GDP. It is predominantly a Christian country, although successive waves of migration have contributed to the growth of other faiths. It is a member of the European Union as well as the Commonwealth of Nations, the Council of Europe, G7, G8, G20, NATO, the Organisation for Economic Co-operation and Development (OECD) and the World Trade Organization.
The many taxing problems of owning homes in Britain
ANY purchaser of British property must give careful consideration to the three main British taxes: income tax on any rents received from the property; capital gains tax if the property is later sold at a profit; and inheritance tax.
Income tax is only likely to be a problem if you let property.
Non-residents are liable to British tax on income arising in Britain, so rents from a British property are fully taxable.
Various deductions are allowed against the rent, such as agent's commission, repairs, insurance and the like; and the net rents are chargeable to tax.
Tax is not only payable at the basic rate of 25 per cent, it is payable at 40 per cent if the rents after all deductions and reliefs exceed GBP23,700 (HK$270,000).
It is important to understand where liabilities fall. If the landlord is in Hongkong, it does not put him beyond the clutches of the Inland Revenue.
If the property is let privately, the tenant must deduct basic rate tax from the rents and pay it to the Inland Revenue. If he fails to do so, the Inland Revenue will still ask him for the tax, and he will have no right of recovery from the landlord.
If the property is let through an agent, the situation is entirely different. He has no right or obligation to deduct tax. He can pay the net rents to the landlord if he wishes.
However, he is unlikely to do so because the agent is personally and primarily liable for any tax liability which arises on the rent. He is likely, therefore, to hold on to part of the rent so that he can meet this liability.
The largest expense in connection with the property is likely to be the interest paid on the mortgage. It is essential that this interest is tax deductible.
This is a very complex area but, if the arrangements are dealt with correctly, the loan can be taken out in Hongkong, in Hongkong dollars, repaid in Hongkong in Hongkong dollars, and interest can still qualify for a deduction from the British rents.
The rule is that the interest must be payable in Britain on a loan from a bank carrying on a bona fide banking business in Britain.
There is no requirement that the money is borrowed from the British branch; it can be borrowed from a foreign branch and, if required, in a foreign currency.
The terms of the letting also need to be considered. The loan may be properly arranged, but a tax deduction will not be allowed unless the property is fully let on a commercial basis for at least 26 weeks in any 52-week period, and available for letting during the remainder of the period.
Capital gains tax is only payable if the person making the gain is in Britain. The fact that the property is in Britain does not render it liable to capital gains tax, in contrast with the income tax position.
Until recently, the existence of a property in Britain could render an individual resident of the country (and therefore liable to capital gains tax) if it was available for their use, but fortunately this year's budget proposed the abolition of this rule from April.
The obvious way of avoiding capital gains tax is to sell British property before taking up residence in Britain. In that way, the gain will be made during a period of non-residence.
However, it may be undesirable or inconvenient to sell the property prior to arrival in Britain, in which case it could be transferred to a trust.
A trust for the benefit of the individual and his family would usually be appropriate and the transfer would represent a disposal for capital gains tax, thereby washing out any gain.
Inheritance Tax (IHT) is determined by reference to domicile, which is not the same thing as citizenship.
Domicile is your natural home.
British domiciled individuals are liable to IHT on their worldwide assets.
Their residence is irrelevant, so the fact that they are in Hongkong makes no difference.
However, those with a foreign domicile, or a foreign domiciled spouse, are chargeable only on their British assets, and this privilege can be used to substantial advantage.
For example, the British property could be purchased by an offshore company. The foreign domiciled individual would hold the shares in the company. The shares would be foreign property and outside the scope of inheritance tax.
This works very well - but it should never be done where it is intended to use British property as a residence. In that event, the Inland Revenue will impose a large income tax liability which would more than outweigh any possible IHT saving.
The British tax authorities are sophisticated; they have some wide powers and equally wide sources of information.
Barry Lea is regional director, financial services and marketing, for Hill Samuel.