The Chancellor announced plans in the Autumn Budget 2017 to tax gains arising to non-residents on UK immovable property (e.g. land and buildings). This is backed up by a consultation document on the issue and anti-forestalling rules effective from Budget day.
What are the current rules?
Under current law a non-UK resident is not liable to UK capital gains tax on investment gains arising on UK property unless such property is residential property where a specific regime applies which, subject to a number of exemptions, taxes gains from UK resident property regardless of the residence of the owner.
Whilst income derived from UK property is generally subject to UK tax, the beneficial non-resident capital gains tax regime results in the UK being an attractive place for real estate investment by non-residents.
What is the government proposing?
The government is proposing to introduce rules effective from April 2019 to tax all gains derived from UK immovable property and indirect holdings of such property to UK capital gains tax or corporation tax – regardless of residence of the party disposing. The rationale is to remove the advantage that non-UK residents have over UK residents and to reduce the incentive for holding UK property in offshore structures in low or no-tax jurisdictions.
The government is also proposing changes to the current residential property rules to bring gains from indirect sales and disposals by non-UK resident widely held companies within the scope of UK tax.
Key details from the proposals are as follows:
- There will be one regime for disposals of interests in residential and commercial property, regardless of residence of the party disposing.
- Rebasing will take place as at April 2019, with only gains attributable to increases in value from that point being caught by the new rules.
- There will be rules capturing gains on indirect sales for both commercial and residential property where:
- the entity is “asset rich” with 75% or more of gross asset value represented by UK immovable property (non-UK land will be ignored); and
- the non-UK resident holds at least a 25% interest in the asset,
(the “Indirect Ownership Test”).
- Indirect ownership will include shareholdings, partnership interests, interests in settled property and options. The rules will apply to the gain arising on the indirect interest (i.e. the shares) and not the underlying property.
- The rules taxing the disposal of residential property by non-UK residents will be extended to disposals made by widely held companies and life assurance companies.
- A potential reporting requirement for advisers.
- There is potential for harmonising the ATED-related gains rules with the wider regime being proposed.
- Where the non-UK resident is a body corporate, the charge will be to UK corporation tax. In all other cases it will be to UK capital gains tax.
- Losses and gains will be treated in the same way as other losses and gains for corporation tax in terms of availability for relief. Therefore, group relief would be available.
- There will be a new targeted anti-avoidance rule.
Double tax treaties
There is discussion about the application of double tax treaties but no proposals in relation to those, save for an anti-forestalling rule effective from Budget day. This will apply if arrangements are entered into which have a main purpose to seek to avoid (through relief, reduction etc), through the use of double taxation arrangements, the tax that would otherwise come into charge under the new rules.
What about institutional investors and funds?
The Budget announcement notes that the government intends to include targeted exemptions for institutional investors such as pension funds. However, the discussion in the consultation document is limited to the comments below.
HMRC notes that persons currently exempt from tax on UK capital gains or not within the scope of UK tax, otherwise than as a result of being non-UK resident, will remain exempt or outside the scope. This measure will protect pension fund investors.
HMRC further notes that the impact of the proposals on collective investment vehicles and the funds industry generally needs careful consideration. It proposes that, whilst there will be no change to the tax regime of funds which are currently not subject to tax due to specific tax codes (REITs, EUUTs etc), the disposal of the interests in such funds by non-UK residents will be subject to UK capital gains tax if the interests pass the Indirect Ownership Test.
Finally, HMRC notes that it is possible for the substantial shareholdings exemption, which has been expanded to apply to qualifying institutional investors, to apply to disposals of property-rich companies or groups.
Reporting burden to involve advisers
HMRC recognises that not all non-residents will report transactions within the rules, through a lack of knowledge of applicability or otherwise. Accordingly, the government intends to require certain UK advisors to notify HMRC of the transactions. HMRC recognises that this will need careful thought.
It also begs the question as to how HMRC will actually enforce against non-UK residents. At this stage, there is no mention of any withholding tax regime.
We will all need time to take stock on the proposals and to respond to the consultation, which closes on 16 February 2018. The BPF has already responded, stating “the Chancellor’s announcement on Capital Gains Tax for non resident investors is particularly unwelcome and we are planning an urgent and vigorous response.”
Non-residents owning UK real estate will need to consider current holding structures and future investments plans in relation to potential acquisitions and disposals to work through the impact of the rules both in terms of tax costs and asset valuations.