On 6 July, draft legislation was published which will herald a significant change to the UK property tax regime for offshore investors.

Under the current rules non-residents, including individuals, trustees, and close companies (which are broadly companies owned by five or fewer unconnected shareholders) are generally taxable to non-resident capital gains tax (NRCGT) on gains made on disposals of UK residential property but not on other types of property.

The government now wishes to "level the playing field" between UK residents and non-residents and, to this end, it proposes that for disposals of UK property by non-residents on or after 6 April 2019:

NRCGT will be extended to cover disposals of all UK land, including commercial real estate;

  • Widely held companies will be within the scope of tax on disposals of UK land, effectively bringing all corporate owners into the scope of tax on gains on all UK real estate;
  • Where it applied, ATED related CGT will be abolished and all corporate owners disposing of UK land will be subject to corporation tax rather than CGT. (Going forward, the property income of non-UK companies holding UK property will also be subject to corporation tax, rather than income tax, but this will only take effect from April 2020);
  • Indirect disposals of UK land (e.g. a sale or gift of shares in a property holding company) will attract a charge if a non-UK resident is disposing of an interest in a UK "property rich" vehicle, unless the land itself has been used for UK trading purposes both before and after the disposal;
  • An entity will be "property rich" if at least 75% of its gross asset market value is derived from UK land and the charge will only apply where the disposing owner (together with any connected persons) holds more than a 25% investment (directly, or through a series of other entities) in the property rich vehicle at any time in the two years prior to disposal. It is not yet completely clear how these two thresholds will apply in practice, particularly where there is a chain of companies, each owning a variety of assets. The government is expected to produce technical guidance on this and other details at a later date;
  • Non-residents, who are not already within the scope of NRCGT, will be able to benefit from re-basing so that they will only be taxed on gains arising over the market value on 6 April 2019 of the shares or property disposed of. Alternatively, it may be possible to make an election to use another calculation method if preferable.

The legislation is still a work in progress and there are many details to be concluded. The draft provisions were open for consultation until 31 August 2018 and the Finance Bill 2019 will be officially published shortly after the Autumn Budget. However, even when the legislation is complete, there are likely to be various issues on which the interpretation and application to real life scenarios remains unclear. In the meantime, investors in UK land should think about undertaking an "audit" of their property holding structures in order to prepare for these changes.