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Background – non resident investors in UK property
The devil is in the detail is probably the most oft heard statement on Budget Day. Phil didn’t disappoint this year with something buried so deep, it was in danger of re-emerging on a good length at the Gabba.
I suspect the reason why this fundamental change was kept low key as Labour MP Stella Creasey has been campaigning in a high-profile manner for such changes.
It was revealed that the Government intends to bring non-UK residents further within the scope of UK capital gains.
As many will be aware, it is an enduring principle of UK capital gains tax that non-residents, aside from a few anti-avoidance rules, have not been within the scope of UK Capital Gains Tax (CGT). That changed with effect from April 2015, where the direct disposal of UK residential property was dragged in to the regime.
It always appeared that this narrow change was merely the thin end of the wedge. Sadly, that prediction has now come to pass.
These new proposals, which seem to be rather well formed, will further encroach on this principle, in three main respects in relation to non resident investors in UK property:
The full consultation document can be found here.
Although these rules are ‘out for consultation’ it is clear from the paper that the ‘core features’ are already set in stone (see Para 1.6). We explore each proposed change in more detail below.
Up to now, aside for certain anti-avoidance provisions, a non-resident investor disposing of an interest in commercial property would simply not be subject to tax (unlike his UK resident counterpart.)
However, the Government’s consultation document sets out the fact that it is the intention that, with effect from April 2019, capital gains on disposals of commercial property by non-UK resident investors will become subject to tax.
Where the investor is an individual, partnership or trust then they will be subject to Capital Gains Tax on the disposal at the relevant rates.
Where the investor is a non-UK resident company then any gains, as one might expect, will become liable to corporation tax.
However, the revisions do not stop there.
In addition to direct disposals of land and buildings being dragged in to the capital gains tax net, the proposal is that the charge will be extended to indirect disposals of interests in UK commercial or residential property.
This charge will be targeted at disposals of interests in so-called “property rich” companies. Such an entity will derive, whether directly or indirectly, 75% or more of its value from UK land. This test will be applied to the gross asset value of the Company meaning no allowance for liabilities is allowed.
Excluded from this new tax charge will be investors who hold less than 25% of the property company. This test will take in to account the holdings of connected persons. In addition, this test will look back 5 years prior to the disposal to see if the 25% threshold has been breached at any time.
As with the original Non-resident CGT rules, which provided that only parts of any gain arising from 6 April 2015, only gains arising after the commencement of the new rules will be within the charge. In the present case, the consultation states that only the gains linked to the changes in value from April 2019 will be chargeable.
Essentially, this will be achieved by providing rebasing for any commercial property (and residential property held by widely-held companies) to the value at April 2019 for the purposes of calculating the gain on disposal.
To further complicate matters, where the rules bite in relation to the disposal of shares or other interests in property rich vehicles (and remember this could be a residential property rich company) then any tax will only be applied to the growth in value since April 2019.
To further, further complicate matters consider how rebasing might apply if the property is mixed use? Or if the property has changed from residential to commercial use between the two different rebasing periods?
In Part 6 of the paper, the Government acknowledges that these changes will have an impact on non resident investors in UK property who invest through collective investment vehicles. For example, those who invest through Real Estate Investment Trusts (“REITs”) and Property Authorised Investment Funds (“PAIFs”).
The decision to tax non resident investors in UK property on the disposal of indirect interests will catch the disposal of such fund interests. The Government has acknowledged care must be taken though it seems there will be no exemption for this type of investor.
Generally speaking, these changes are a blanket extension. However, it appears to be the case that those with a general exemption from UK tax, such as UK and overseas pension funds plus sovereign wealth funds, will remain outside the scope of this tax charge beyond April 2019.
Of course, it will be quite common for, say, indirect interests to be bought and sold amongst non resident investors in UK property. A practical issue is whether such people, who may have no other connection with the UK, know about these rules (as they are contrary to enduring UK principles) and, if they do, how can compliance be enforced and the tax collected.
Well, it seems that it will be left for UK advisers to police these new rules! For further details on these whizzy idea see Part 7 of the consultation doc.
Clearly, the UK is not an island. Well, it is literally, but not economically or legally. It is part of an global economy and corresponding legal framework.
As such, some of the UK’s tax treaties do not permit the UK to tax disposals by non-UK residents of interests in property-holding companies where the property is in the UK.
As such, non resident investors in UK property based in these jurisdictions will remain outside the scope of this new tax charge if and when they make an indirect disposal of UK land.
However, the consultation document also sets out the intention that provisions will be introduced to prevent ‘treaty shopping’.
These rules would bring in reams of additional complex legislation. It seems a pertinent question to consider why doesn’t the Government take the much simpler approach of levying CGT (or corporation tax) on the disposal of all UK assets by non-UK investors. In other words, put the jurisdictional basis of the tax on a footing with most other economies.
Some might say this could impact investment in UK based businesses as they become less attractive to overseas investors. However, the Government justify these property changes by saying they will level the playing field?
One must also question whether the timing is desirable. Is further discouraging investment in the UK the way forward in the year we are (supposedly) leaving the EU?
Would it not be simpler, and fairer, that the playing field was made completely flat by simply extending the jurisdiction of UK CGT? It would probably save a good many trees when the relevant legislation is published!
If you have any queries about these changes to the taxation of non resident investors in UK property, any other Autumn Budget 2017 changes or other tax issues then please get in touch.