Expat landlords renting out homes in the UK face higher tax bills to pay for care in their old age even if they don’t benefit because they live overseas.
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Although most landlords escape the levy because they do not pay national insurance (NICs) on rental profits, corporate landlords face a different tax regime.
That’s because the government is imposing a 1.25 per cent healthcare and social levy on any director or shareholder of a UK company who draws dividends of more than £2,000 in a tax year.
The watertight regulations are likely to mean 40 per cent of directors and shareholders will contribute to the levy, which expects to raise £12 billion a year.
The money is earmarked for upgrading the National Health Service and social care.
How Much Extra Tax Directors Will Pay
The levy hikes the tax rate on dividends for everyone by adding 1.25 per cent to the current rates:
| Tax band | Current dividend tax rate | New dividend tax rate |
| Basic rate | 7.5% | 8.75% |
| Higher rate | 32.5% | 33.75% |
| Additional rate | 38.1% | 39.35% |
The new rate is applied to dividends drawn in the tax year:
| Tax band | Tax paid on £5,000 dividend at the current rate | Tax paid on £5,000 dividend at the new rate | Extra tax |
| Basic rate | £225 | £263 | £38 |
| Higher rate | £975 | £1,013 | £38 |
| Additional rate | £1,143 | £1,181 | £38 |
| Tax paid on £10,000 dividend at the current rate | Tax paid on £10,000 dividend at the new rate | ||
| Basic rate | £600 | £700 | £100 |
| Higher rate | £2,600 | £2,700 | £100 |
| Additional rate | £3,048 | £3,148 | £100 |
| Tax paid on £20,000 dividend at the current rate | Tax paid on £20,000 dividend at the new rate | ||
| Basic rate | £1,350 | £1,575 | £225 |
| Higher rate | £5,850 | £6,075 | £225 |
| Additional rate | £6,858 | £7,083 | £225 |
The Treasury is awaiting confirmation to see if the care tax levy triggers extra tax for borrowers with director loans.
If a director borrows from a company and the loan is not repaid by the date Corporation Tax is due, a 32.5 per cent tax charge is made against the outstanding amount.
This charge could rise to 33.75 per cent from April 6, 2022, which seems likely.
What Is The Care Tax?
The new health and social care tax aims to raise extra cash for the National Health Service and social care providers.
The levy will start from April 6, 2022, and run for 12 months. After that, a new levy will be launched along the same lines.
Chancellor Rishi Sunak wishes to raise around £12 billion a year from the levy to fund services for people in their old age. However, the policy is controversial as Prime Minister Boris Johnson and his Tory Party pledged not to raise taxes during this Parliament.
“The plan for health and social care will lead to a permanent increase in spending. It would be irresponsible to meet these costs through higher borrowing, particularly in record borrowing and debt, to fund the economic response to COVID-19. The government has therefore decided to increase taxation,” said the Chancellor.
How The Care Tax Works
Everyone with property, investments and savings worth more than £23,250 has to pay for their non-health-related care.
This money covers bills in retirement for staying in a care home to carers calling in to help with cleaning, cooking and washing and has no cap. So, whatever you spend, you pay for.
The policy has seen hundreds of families sell their homes to cover the costs of later-life care.
The new levy relieves some of this stress by capping care costs at a lifetime limit of £86,000 a person.
From April 2021, the care policy covers three scenarios:
- Anyone with assets of less than £20,000 will have their care costs paid by the government
- Those with assets between £20,000 and £100,000 pay for care on a sliding scale. They only pay 20 per cent of the value of their assets each year, and once their savings dip to £20,000, the government picks up their care tab
- Anyone with assets of more than £100,000 pay the total cost of their care until their savings drop below £100,000. Once that level is reached, they move into the last category above.
Every Dividend Earner Pays Care Tax
First, all property firms listed on the Companies House register will pay the care tax on dividends regardless of where the directors or shareholders live.
The taxman will automatically add the levy to Corporation Tax bills.
If the company runs payroll for staff, the care tax is added to national insurance deductions for employers and employees.
The regulations are written, so directors pay the care tax levy on salaries as well as dividends.
The tax rates are the same for salaries and dividends.
Care Tax Hikes Expat Landlord Tax Bills FAQ
The new rules are still passing through Parliament but are expected to pass into law before Christmas 2021. The wording covers directors and shareholders but does not discriminate between those living in the UK or abroad.
Until the act is passed, the levy is applied at the same rate across payroll and dividends, so switching how money is drawn from a company will not impact the care tax bill.
The only reasonable way to minimise the payment would be to introduce more shareholders to the company, but this could impact their tax in the UK and overseas.
Never say never, but Boris Johnson seems to have his party’s support even though he promised not to raise taxes in his election manifesto.
Expat landlords renting out homes in the UK face higher tax bills to pay for care in their old age – even if they won’t benefit because they live overseas.
• If your dividends are under £2,000 a year, you do not have to tell HM Revenue and Customs
• If they are between £2,000 and £10,000, you can adjust your tax coding or report the earnings on a self-assessment return.
• If your dividends are more than £10,000 a year, you must file a tax return.
As a director and landlord, you probably have no extra paperwork as you should already file a tax return.
If you own buy to let property personally, no national insurance contributions are due on profits as they are considered money generated from investment rather than earnings.
As no NICs are due on rental profits, no care tax levy is due either.
No. The care tax is the UK specific and only for spending in Britain.
HMRC published a policy paper online with more details about the levy, which you can read here
Anyone earning a salary or drawing dividends must pay from April 6, 2023, but people below the state pension age are exempt for the first year.
Property investors will need to crunch the numbers before incorporating their buy to let businesses.
The outcome is likely to be different for every investor, depending on their non-property income levels.
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