From 6 April 2019, all gains from UK real estate realised on disposal by non-residents, whether residential or commercial property and whether by way of direct or "indirect" disposal, will be subject to UK capital gains tax or corporation tax.
Why the change?
Non-residents have for some time had an advantage over UK residents when it comes to the taxation of UK commercial real estate, due to the fact that unlike most other major jurisdictions the UK does not exercise its full taxing rights as afforded by international tax rules.
The government now attempts to 'level the playing field'.
From 6 April 2019, a single UK tax regime will apply to sales of both residential and commercial UK real estate by non-residents, comprising
- a new UK tax charge for gains on "direct" sales of UK real estate; and
- a new UK tax charge for gains on "indirect disposals" of UK "property rich" interests. This will bring within the scope of UK tax disposals by non-residents of certain companies, partnerships and unit trusts holding UK real estate.
The applicable rate of UK tax will be 19% for non-resident companies caught by the new rules and, for non-resident individuals and others, up to 20% (in the case of commercial property) and up to 28% (in the case of residential property).
The new tax charge(s) will in each case only apply to gains arising since 6 April 2019 (i.e. property held at that date will be rebased to its current market value).
One aspect of the new regime that has been the subject of much debate is that, from 6 April, a tax charge will arise on gains on disposals by non-residents of interests in entities that themselves hold UK real estate. This so-called "indirect disposal" charge will only apply to disposals of interests in "property rich" entities. This will be the case if:
- at the time of disposal, at least 75% of the value of the interest (e.g. shares) sold is derived from UK land. This test is applied to the gross-asset value of the entity in question, using the market value of the assets at the time of disposal; and
- the non-resident making the disposal holds at least a 25% interest in the entity.
There will be a "trading" exemption so that (broadly) a disposal of an otherwise "property rich" entity by a non-resident will not be caught by the new tax charge if the UK land held by the entity is used in the course of a trade during the 12 months prior to the disposal, and immediately after. This is likely to benefit hotels, care homes and retailers.
Collective investment vehicles (CIVs)
This "indirect disposal" aspect of the new UK tax regime has caused much concern for the UK property industry as, without bespoke rules for CIVs, the new "indirect disposal" tax charge would have jeopardised a basic premise of UK real estate investment structuring; to ensure that from a tax perspective the investor is placed in no worse a position than if they had invested directly.
The position for CIVs was the last to be finalised. For "property rich" CIVs, the position is:
Default position: an offshore CIV which is not a company, nor a partnership (e.g. a JPUT), is treated as a company for the purposes of the new UK tax charge. Rights of investors in such an offshore CIV are treated, for these purposes, as shares. The effect of this default treatment is that the offshore CIV will, from 6 April 2019, be subject to UK tax on any gains from direct sales of UK real estate.
Transparency election: an offshore CIV that is not a partnership (e.g. a JPUT or a company) may make an election to be treated as a partnership for the purposes of the new rules. Any direct disposal of UK real estate by the CIV in this case would be taxed in the hands of the non-resident investors.
Exemption election: an election for exemption from UK tax on direct disposals of UK real estate by both (i) an offshore CIV and (ii) by companies held by the offshore CIV, can be made by (1) offshore CIVs that are companies, and (2) non-CIV companies that are wholly-owned by CIVs that are partnerships.
Regardless of the making of any election, non-resident investors in offshore CIVs will be caught by the new "indirect disposal" UK tax charge on disposal of their CIV interests if the CIV is "property rich". For disposals of interests in CIVs there is no 25% ownership threshold.