The UK government has recently introduced a number of ways to tax overseas individuals and companies on their ownership of UK land. But, at present, the focus is on residential land with an expectation that in time this will be extended to commercial land. We discussed these issues in detail in a previous newsletter.
We set out below the three big changes happening in this area and explain why the pendulum could well be swinging towards simple holding structures.
The first change is that, with effect from April 2015, all gains made by non-UK residents (individuals or companies) in UK residential property is now subject to tax on the post April 2015 gain at 28% for individuals and 20% for companies. Whilst this may be considered to be a deterrent, for many investors this can be avoided. When first announced, there were to be only very limited exceptions to this charge. But as, a result of lobbying there is a funds exception which we feel is extremely attractive.
Crucially, where UK residential property is sold by a "diversely held company" or a "widely marketed fund" the new charges do not apply. The ATED (and CGT related) charges still need to be considered for owner occupiers but for pure investment purposes this is normally not a problem.
The second big change is the new supplemental SDLT charge which increases the SDLT rate on the acquisition of a second residential property by three percentage points.
Soon for IHT purposes in identifying if the asset is in the UK, you effectively look through a company structure to any UK residential land.
Looking at the above holistically means we are seeing more and more clients taking this as an opportunity to collapse their complicated structures for holding UK residential land.
If you have an offshore structure and want to bring this onshore following Brexit, now might even be an opportune moment to do this. If there has been no gain from April 2015 to the date of disposal, this first tax charge reduces to zero. You can choose whether to time apportion or look at the actual gain from that date. However, watch out if a UK resident has (with their relatives) more than 25% of any offshore company making a gain. If so, the tax can still be legitimately avoided but there are further steps to follow which have a number of knock on effects. Although the various UK tax professional bodies lobbied HMRC for reliefs to encourage this type of collapse, their voices were ignored.
All of this needs to be considered against the backdrop of the UK's corporation tax rates. Shortly before the referendum, the then UK Chancellor, George Osborne announced the rate of corporation tax would be dropping from its current low rate of 20% to an even lower rate. After the referendum he further emphasised the intention to bring the rate down to 15%. The post Brexit government seems to want to follow this ever reducing rate of corporation tax. We expect this to counteract some of the negativity which has been in place since the referendum. By contrast, France has recently announced that its rate of corporate tax will drop from 33% to 28% and not until 2020.
It seems not long ago we were worried about the proposed mansion tax and the complete removal of the advantage non-doms have in the UK (who broadly only pay tax on their UK income). These all look to have been shelved and simplifying matters seems to be the order of the day.