The UK Government is going ahead with a major change to its rules for taxing gains on residential property. We examine the impact of the extended charge on corporate owners.
From 6 April 2015, all non-resident owners (including individuals, trustees and certain closely held companies) will be within the scope of UK capital gains tax. Owners of commercial property will not be affected by this change.
Isn't there already a CGT charge for non-UK resident companies?
The UK first extended the scope of its capital gains tax charge in 2013, when it introduced an annual tax charge for residential property held in a corporate "wrapper": the annual tax on enveloped dwellings or "ATED". A company (whether UK resident or not) subject to ATED is also liable to UK capital gains tax at 28 percent on gains accruing from 6 April 2013 to the date of disposal. There are some important exceptions to ATED, for example, companies that are carrying on a trade of property rental or development are outside the scope of the annual charge and of the ATED-related capital gains tax (although they still need to complete and submit ATED returns).
A new CGT charge
From 6 April 2015, a new capital gains tax charge will operate alongside the ATED-related gains charge. Although it will mainly affect non-UK resident individuals and trustees, it will also affect some companies; the target is non-resident companies that are the private investment vehicles of individuals, families or small groups of individuals and families. There are specific exemptions for widely held companies and institutional investors such as unit trusts, pension schemes and collective investment vehicles. A non-resident company under the control of five or fewer participators will fall within the rules, and for these purposes, the interests of closely related family members will be aggregated. Unlike the ATED regime, there is no exception for property rental or development businesses.
Paying the tax
The rate of tax under the new charge will be 20 percent, the same as the UK corporation tax rate from April 2015. It will only apply to gains accruing from 6 April 2015 to the date of disposal and will be collected by the non-resident owner notifying HMRC within 30 days of disposal and making payment. Owners who are already within the UK self-assessment system can complete their return and make payment within the normal time limits. It is not clear how HMRC will be able to enforce the notification and payment mechanism.
Companies within the scope of the charge will be entitled to a form of indexation allowance and groups of companies will have the option to operate a limited form of pooling, so that gains and losses made by different members of the same group can be offset. This will be subject to the companies being able to provide evidence regarding ownership, so not available if those involved want ownership details to remain confidential.
Questions that property owners need to ask
Having two separate capital gains tax regimes for UK residential property operating alongside each other will inevitably make life complicated for companies owning UK residential property, who will need to consider the following questions:
- UK resident companies: Do the ATED exemptions apply? No: within ATED. Yes: corporation tax on chargeable gains applies.
- Non-UK resident companies: Do the ATED exemptions apply? No: within ATED. Yes: Is the company closely held? Yes: it's within the extended CGT regime. No: it's outside the UK CGT net.
Cooling the UK residential market
The rules for taxing UK real estate are now extremely complex, with completely different CGT and stamp duty land tax (SDLT) regimes applying to residential and non-residential property. The initial tax take from ATED has been higher than expected, but it does now seem that ATED, the ATED- related gains charge, the prospect of the extended CGT charge for non-residents and the higher SDLT rates have put a brake on the rapid price increases at the very top end of the market.