The UK Government has announced that from April 2019, UK tax will be charged on gains made by all categories of non-UK resident sellers on both direct and indirect disposals of UK real estate, extending existing more limited rules that apply only to residential property.
This announcement represents a fundamental change to the current rules governing the taxation of chargeable gains on UK real estate.
The Government has also announced a trust taxation review and certain other anti-avoidance measures.
UK real estate taxation
The key points in relation to the announcement are as follows:
- The new rules are intended to create a single regime for disposals of interests in both residential and non-residential property. Currently, only the direct disposal of an interest in UK residential property by a non-UK resident individual, trust, personal representative or closely-held company falls within the charge to UK tax on chargeable gains. Direct disposals of residential properties by non-UK resident widely-held companies are not caught, nor are indirect disposals of residential property or any direct or indirect disposal of commercial property.
- With effect from April 2019, gains arising on the disposal by a non-resident of any type of UK property will be subject to corporation tax or capital gains tax in respect of gains accruing after April 2019 (with a rebasing as at April 2019). This will also apply to indirect disposals – i.e., disposals of shares in "property-rich" companies (which, broadly speaking, are those where 75% or more of the company's gross asset value at disposal is represented by UK real estate) by a person who holds, or who has held at some point during the 5 years prior to the disposal, a 25% or greater interest in the company. Although the new charge will apply only to gains arising on disposals after commencement, the 25% test will take into account ownership before that time and will also consider the interests of the nonresident's related parties in determining whether the threshold is met. The new rules will catch both a direct disposal of the interest in the property-rich company as well as a disposal of an interest in a holding company or equivalent entity with a structure of entities beneath it which, taken together, meet the property richness test.
- In order to help HMRC enforce the new rules, the Government intends to impose a reportingrequirement in some circumstances (for example, in the context of an indirect disposal) on certain UK advisers who are aware of the conclusion of the land transaction.
- Anti-forestalling measures will be introduced with effect from yesterday to prevent restructuring preApril 2019 to make use of the UK's Double Tax Treaty network in a way that would prevent the UK imposing tax. The anti-forestalling rule will remain in force as an anti-avoidance measure after the new charge is introduced, until such time as relevant treaties have been amended to prevent any risk of abuse.
- In response to the March 2017 consultation on bringing non-resident corporate landlords into the charge to corporation tax in respect of rental income, many people highlighted the complexity of the Annual Tax on Enveloped Dwellings-related capital gains tax rules. In response, the Government intends to structure the new rules announced yesterday in such a way that, as far as possible, one regime applies for all disposals of interests in UK real estate by non-residents, and that the regime is robust and cohesive. As a result, the Government will be considering the case for harmonising the existing ATED-related gains rules within the wider regime for taxing non-residents' gains on UK property and how to meet the objective of simplification in doing so.
- This announcement was somewhat foreseeable, given the changes made over the past few years, to level the playing field in respect of the taxation of UK property between UK residents and non-UK residents. It was also the next logical step following the Government's consultation on bringing non-UK resident corporate landlords within the scope of UK corporation tax (as opposed to UK income tax) in respect of rental income. The Government is due to announce the results of this consultation shortly, although it is clear that this change will also be made.
- The Government has announced that the changes will be open to consultation, which will run to 16 February 2018. However, it is clear that many aspects of the reform have already been fixed (such as who is in scope, the commencement date and the core features of the provisions governing direct and indirect disposals) and that the Government is, in fact, only consulting to ensure that the legislation is sufficiently well targeted. The Government will publish draft legislation in late summer 2018.
Other relevant changes announced in the Budget
- The Government has stated that it will publish a consultation in 2018 on how to make the taxation of trusts "simpler, fairer and more transparent". At this stage, there is very little detail known about this proposed consultation. It is possible that this may focus on UK resident trusts as there has already been considerable consultation and legislation on non-UK trusts established by UK resident nondomiciliaries.
- The Government will publish a consultation response on the proposed requirement for designers of certain offshore structures, that could be misused to evade taxes, to notify HMRC of these structures and the clients using them.
- To prevent the avoidance of legislation designed to ensure that asset managers receiving carried interest pay capital gains tax on their full economic gain, the Government will remove the transitional commencement provisions with immediate effect.
Finance Act 2017 becomes law
Significant changes to the taxation of UK resident non-domiciliaries (non-doms) and the way in which UK Inheritance Tax (IHT) is charged on UK residential property have now become law. The legislation will apply retrospectively from 6 April 2017, and is broadly as follows:
- All UK residential property held directly or indirectly by non-doms (or trusts established by them) has been brought within the scope of IHT. Non-doms holding shares in a close company that derives its value from UK residential property will be subject to a charge to IHT on their death or on certain lifetime transfers. Where UK residential property is held in an offshore trust (including indirectly, e.g. through an offshore company), the trustees will be subject to ten year anniversary charges (at a rate of up to 6%) and there may be exit charges if the shares in the offshore company are transferred out of the trust.
- There are provisions to catch "relevant loans" meaning that any debt used to finance the acquisition, maintenance or enhancement of UK residential property will, from 6 April 2017, be an asset subject to IHT in the hands of the lender.
- Non-doms will be deemed to be UK domiciled for all UK tax purposes after they have been UK resident for 15 out of the past 20 tax years (the 15/20 Rule), or whilst they are UK resident if they were born in the UK and had a UK domicile of origin (the Formerly Domiciled Resident Rule). For individuals meeting either of these rules, the remittance basis will no longer be available and they will be taxed in the UK on their worldwide income and gains on an arising basis.