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5 March 2018
Non UK resident commercial property investors income tax and CGT
General – Non UK resident commercial property investors income tax and CGT
The area of non UK resident commercial property investors income tax and CGT still remain relatively straightforward. Certainly, when compared with similar investment in UK residential property.
That said, there is little economic justification for the special treatment that the Treasury has afforded to residential property and the feeling is that those rules were very much the thin end of the wedge.
Indeed, we can see the mission creep taking effect already. Firstly, we have the changes to the SDLT regime for commercial property and now we have the announced extension of the jurisdiction of CGT to non-residents investing in UK commercial property.
Assuming one has acquired the UK commercial property to let out then one will need to consider one’s UK income tax obligations. As there is a UK source of income, there will be a UK tax reporting requirement.
As well as being subject to tax in the UK on the UK rental source one may also be subject to tax on the same income in their country of residence. In such cases, one should check out whether there is a double tax treaty in place dealing with this income.
The UK operates a distinct scheme for non-residents to report UK rental income known as the Non-Resident Landlord (“NRL”) scheme. This applies where rents exceed £100 per week.
Generally, companies pay corporation tax on their rental profits. However, under the NRL scheme, non-resident companies fall within the income tax regime. However, there are proposals to bring this within the corporation tax regime.
The rental profits from UK property are aggregated with other income taxable in the UK and applied to the appropriate rates of tax. The current rates of Income Tax (“IT”) are 20%, 40% and 45% and apply to the aggregate of one’s taxable income.
Where an individual, company or trust falls within the definition of a non-resident landlord, the letting agent or tenant must withhold basic rate tax before passing on their rents.
The non-resident landlord subsequently reports their income gross on their self-assessment tax return, with any tax liability considering amounts withheld by the letting agent and/or tenant under the NRL scheme. If the tax deducted exceeds one’s actual liability, one may claim a refund from HMRC.
Alternatively, and more commonly, the commercial property investor may apply to HMRC to receive their rental income gross and thus avoid the additional administrative requirements of the NRL scheme.
It is worth noting that where one is trading in UK property, the profits will fall within the trading income regime and not within the NRL scheme. However, property trading and development income is outside the scope of this note.NRCG
Capital allowances on commercial property
Investment in commercial property will usually also include investment in property embedded fixtures and fittings.
This type of capital expenditure might qualify for valuable tax reliefs. For further information, please check out this article.
Annual Tax on Enveloped Dwellings (“ATED”)
Historically, individuals would hold property in a corporate entity for various tax reasons. One of the most popular reasons being to protect UK property from UK inheritance tax.
A by-product of this was that shares in a property company could be dealt in effectively as stamp duty on shares is levied at a much lower rate (0.5%) than for the purchase of a property. If the Company was incorporated outside of the UK then there would be no duty at all.
As such, the government introduced ATED several years ago. This is an annual tax payable by companies which own UK residential property where the value of the property interest is £500,000 or more.
There are various exemptions from this charge, for example, where the property is let on a commercial basis.
However, this applies only to residential property. Therefore, commercial property held in corporate entities will not suffer this charge.
Capital Gains Tax
It is an enduring principle of UK taxation that UK Capital Gains Tax (“CGT”) is only levied on persons that are resident in the UK.
This is regardless of where the asset is located.
Under this principle, our non-resident investor would not pay UK tax on their chargeable gains on the disposal of his UK commercial property.
Historically, this rule has been nuanced by anti-avoidance rules such as the temporary non-residence rule that applies to individuals and also rules curtailing the use of non-UK trusts and non-UK companies for CGT planning.
However, this jurisdictional limit was extended with effect from April 2015. Once again, a special case was made for non-UK residents holding (and disposing of) UK residential property.
It means that where such a person crystallises a gain on such property and part of that gain that has arisen since April 2015 will fall into charge.
This is rather imaginatively known as Non-residents Capital Gains Tax (“NRCGT”).
At the moment, this only applies to UK residential property and non-residents holding UK commercial property continue to escape UK CGT.
New proposals afoot
However, in proposals announced in the Autumn Budget 2017, the UK government stated that it would bring UK commercial property and land within the scope of UK CGT regardless of residency.
More recently, the government have published proposals to form a distinct regime for the taxation of immoveable UK property. This regime has effect to bring the gains from disposals of all UK land by both residents and non-residents, whether residential or commercial, within the UK tax net.
The proposals also for the first time raise the prospect that the disposal of shares in property rich companies will be within the scope of the same NRCGT charge.
There is more information on these proposals, which are likely to be introduced in April 2019 at the earliest, are set out here.
Conclusion – non UK resident commercial property investors income tax and CGT
We have generally seen UK residential property investors being man marked by the Chancellor and suffering a number of aggressive tackles.
However, driven by the additional revenue it has gained from taxing bricks and mortar, the Government has clearly turned its attention to the commercial property sector. A valuable sector, but perhaps one that hasn’t seen the same growth as the residential one.
As such, a non UK resident commercial property investor should make sure he is properly advised.
Articles in this series on Non UK resident commercial property investors tax are as follows:
If you have any queries on non UK resident commercial property investors income tax and CGT, or any other matters, then please get in touch