Non-UK residents and the taxation of disposals of UK commercial property
Over the last few years numerous changes have been made to the taxation of UK residential property including the introduction of Non-Resident Capital Gains Tax regime which brought disposals of UK residential property within the UK capital gains tax system.
From 1 April 2019 (for companies) and 6 April 2019 (for individuals), disposals of UK commercial property by non-UK residents are also subject to UK capital gains tax.
The charge extends to disposals of shares in “property-rich companies”.
Disposals of other UK assets by non-UK residents, such as shares in non-property rich companies, remain outside the scope of UK capital gains tax.
Re- basing of property to April 2019 value
Non-UK residents disposing of properties from 1/6 April 2019 will only suffer tax in respect of gains arising from that date onwards, i.e. the properties will be re-based to their market value at that date.
Non-UK residents making disposals of commercial properties acquired pre- April 2019 onwards will therefore need to obtain valuations of the property at that date.
If the disposal would have resulted in an overall capital loss if not for the re-basing of its value to the April 2019 value, re-basing can be disapplied.
Rate of tax applying
The tax rate applying will be the same as for an equivalent UK tax resident.
For non-UK companies therefore the rate will be the corporation tax rate (currently 19%) while for individuals and trustees it will be 18% or 28%. Individuals and trustees will be able to deduct the annual exemption in determining the taxable gain.
The treatment of capital losses
Non-UK resident companies will be able to relieve losses arising on disposals in the same way as capital losses for UK resident companies.
For non-UK resident individuals, losses will be ring-fenced to be set against gains arising on the disposal of other UK properties, whether residential or commercial, in the same or future tax years.
Should a non-UK resident subsequently become UK resident, any unused UK residential property losses will be available as general losses against other types of gain.
Indirect disposals and “property-rich” companies
To prevent avoidance of the rules by holding properties through a corporate vehicle, the rules have been extended to cover disposals of shares in “property-rich” companies. If shares in such a company are sold, rather than the underlying properties, the gain will still be subject to UK taxation.
A property-rich company is defined as one in which, at the date of disposal, 75% or more of its gross asset value, derives from UK property. Since it is the gross asset value which is considered, no allowance is made for debt and other liabilities in determining whether the test is satisfied.
The legislation also applies an ownership test which considers whether the non-resident, together with connected parties, has held a 25% interest in the land-owning company. That 25% holding can be direct or indirect and the required holding must have been in the past two years, which effectively prevents disposals of the property immediately after reducing holdings to less than 25%.
Non-residents may also be taxed in their country of residence as well in the UK, and further consideration as to whether there is a double tax treaty to relieve the amount of tax paid in the UK or overseas should be sought.
Going forwards the gap between tax due on the disposals of UK property by UK residents and non-UK residents is constantly decreasing as the longer the property is owned, the longer the period to be able to tax the property is.
The below table shows how the tax charges on UK property have changed in the last 5 years:
|Non-UK resident owners of:|
|UK residential property||UK commercial property||Shares in property-rich companies|
|Pre 6 April 2015||No UK CGT||No UK CGT||No UK CGT|
|From 6 April 2015||UK CGT from 6 April 2015 onwards||No UK CGT||No UK CGT|
|From 6 April 2019||UK CGT from 6 April 2015 onwards||UK CGT from 6 April 2019 onwards||UK CGT from 6 April 2019 onwards|