Written by: Wilson YEUNG (International Tax Director, Masson de Morfontaine Limited)
Source: HKGCC Bulletin, January 2016 issue, Thoughts from the Fiscal Front, Pages 36-38
Property & Taxes
- Tax implications and efficient structuring for investing in properties in Australia and U.K.
Property taxation and optimal investment structures are key issues for investors buying properties overseas. This article provides tax analysis and examples of Chinese investors from the Mainland and Hong Kong investing in property in Australia and the U.K.
Over the past year, the Australian property market has been experiencing a boom. Among the big cities, Sydney, Melbourne and Brisbane are leading the surge and are providing handsome returns for foreigner investors. Many investors, as well as people who are looking to upgrade their home, are planning to profit from selling their property in Australia. However, when investors pay their Goods and Services Tax (GST) on the sale of their property, the profits and residual gains can be far less than what they might have expected. So, how can investors reduce their tax obligations legally?
If investors want to hold on to their properties, they can use interest payments, repair and maintenance expenses and depreciation of properties to claim tax deductions and lower their tax liabilities. If investors plan to invest in Australian property, they may consider paying in advance the bank’s interest corresponding to the next fiscal year so that they can enjoy tax concessions for the current fiscal year (i.e. 2015-2016). Alternatively, they may consider paying in advance insurance expenses to reduce taxes. Moreover, if investors are thinking of repairing their properties, they may also consider paying in advance the repair and maintenance expenses to be incurred in the following fiscal year. In addition to the above, equipment expenses, management fees and loss of rent, etc. are all eligible for tax deductions as long as their nature and amount are within the definition and threshold of the prevailing tax law.
If investors want to sell their property, GST comes into play. It is common for investors to try to avoid GST by living in the property themselves at first, and then leasing it to others, so that they can legally proclaim that the property is for self-use over six years. During the aforesaid six years, if investors sell their property, they would not be liable for GST. As such, if investors own several properties, it may be a good idea for them to self-use those highest value-adding properties for a certain period of time.
But what if investors cannot avoid paying GST? The simple answer to that is to pay as low a tax as possible. Investors may enjoy a 50% discount on payable GST if they dispose of their assets one year after purchase. Therefore it is crucial that investors calculate the GST payable each year to capture the most advantages from the applicable law. Investors should also remember that the calculation for GST from the disposal of a property is based on the contract date; not the property transfer date.
The U.K. has a relatively stable economy, which makes property investments less risky and more attractive for Chinese buyers. However, tax compliance requirements in the U.K. are very sophisticated and stringent. The Chinese perspective on buying a property is quite different from that of the British. The British normally buy a property for their own use, and aim to add value from their own property. In contrast, the Chinese usually buy properties overseas for speculation and to earn a good monthly income, which has triggered a capital gains tax (CGT).
In the UK, if investors buy a property for their own use and not to generate income, then there are no tax obligations. If investors lease their property to others and generate a rental income, then even if the investors are not a tax resident of the U.K., they are required to pay 20% income tax for their rental income. In addition, stamp duty is levied when investors buy a property in the U.K. According to the prevailing U.K. tax law, if a property’s value is below £125,000, no stamp duty is levied, but for a property valued at £1 million or £1.5 million, the stamp duty rate is 10% and 12%, respectively.
But there are some tax incentives that foreign investors can enjoy when they buy a property in the U.K. Take Mr. H for example. Mr. H is originally from Hong Kong and immigrated to the U.K. He currently holds land valued at £5 million and is planning to build a student hostel or residential apartments on his land. Under normal circumstance, Mr. H needs to pay the standard rate of stamp duty, and he probably needs to pay inheritance tax in the future. Moreover, Mr. H will need to pay tax on his rental income, and he will also need to pay 28% CGT when he sells his property. Consequently, Mr. H would be advised to consider using an offshore company vehicle to hold this piece of land. The main advantage is this is that an offshore company may be able to avoid U.K. inheritance tax, because this tax is not levied on the overseas estates of the deceased.
Assuming the annual rental income paid to Mr. H is £500,000, his total U.K. tax liabilities would be roughly £250,000. If Mr. H considers using a trust to arrange for loan financing and inject funds into his properties, then his tax liabilities may be significantly reduced. On the annual rental income of £500,000 for instance, he could save as much as £175,000 in taxes. Furthermore, as mentioned above, stamp duty rates vary based on a property’s value. If his property value is £1 million or over, Mr. H may consider splitting his entire property into several residential apartments to qualify for the lower tax rate and thereby effectively reduce his tax liabilities.
Property taxation is a complicated issue for investors. It is worthwhile analysing the tax implications from both local and cross border perspectives (particularly when profit repatriation is considered to make use of double tax agreements, such as the one available between Hong Kong and the U.K. with capital gains provisions), in order to identify tax optimisation opportunities in a legally compliant and feasible way. A holistic approach and forward-thinking strategy that gives rise to an efficient investment structure are always needed.