UK Capital Gains Tax to catch more non-UK tax residents

Draft legislation recently published will start to see non-UK tax residents pay tax in the UK on commercial property gains. This includes gains on hotels, shops and leisure facilities.

Senior Tax Manager, Stephen Martin, explains

Who will be affected?

The new rules will come into effect for all disposals on or after 6 April 2019 (for non-UK resident individuals and trustees) and 1 April 2019 for (non-UK resident companies). There is no de minimis, so all commercial properties are caught.

However, HM Revenue & Customs (HMRC) has indicated that tax advantaged collective investment vehicles (so certain trusts and funds) will continue to benefit from UK tax advantages and so not be caught by these rules.

There are existing rules which apply to non-UK resident companies who are considered ‘close’ for UK tax purposes, which own UK residential property. These existing rules will be extended to catch all non-UK companies with such properties.

What will be chargeable?

Direct disposals of UK commercial property from April 2019 onwards will become chargeable to UK tax.

Indirect disposals can also be charged; sales of interests in UK ‘property rich’ entities are also to be taxed. This means that sales of shares in companies (whether UK companies or not) by non-UK tax residents can now potentially be taxed in the UK.

If relevant, Double Taxation Agreements need to be reviewed to confirm the extent of any double tax relief claims which can be made.

Rebasing property values

In order to determine what gains are chargeable under these new rules, affected commercial property values will be re-based at April 2019.

This means that non-UK residents who directly own UK commercial properties standing at a profit should keep any current gains outside of UK tax. Gains made after April 2019 will, however, fall into the UK tax net as a result of these rules.

Whilst planning around the tax charges is obviously now going to be a consideration, anti-forestalling rules have been brought in to stop arrangements that seek to deliberately avoid the new tax charge.

Why is this being introduced? 

The government’s objective over the last few years has been to ‘level the playing field’ as they put it, so that both UK and non-UK tax residents will be liable to tax on any type of UK land.

Historically, residents outside of the UK have not been subject to UK capital gains tax, which contrasted to rules in Spain, France and Germany. This preferential treatment has been gradually unwound in recent years, with changes in 2013 for residential properties owned by entities and then more widely in 2015 when non-resident capital gains tax was introduced. The new legislation is therefore part of a series of changes to challenge the perceived tax breaks for overseas investors in UK property.

The Treasury expects the new laws to yield over £400m from 2019 to 2023, so it is clear that the playing field will bear fruit once it is levelled!

Complexity in the new rules

The new rules on indirect disposals are certainly the most complex of the new rules and probably those most likely to catch individuals out.

Capital gains tax will apply on indirect disposals if the ‘property richness’ and ‘ownership’ tests are both met.

An entity is considered ‘property rich’ if at least 75% of the total market value of the qualifying assets is derived from UK land, with an exemption applying for land used in a trade.

An individual meets the ‘ownership’ test if they hold 25% or more of the entity. Interests held by connected parties, such as spouses, will be aggregated. The test will also be met if there was a 25% holding up to 2 years prior to disposal.

Bishop Fleming’s view

Our view is that these new rules will cause some significant problems, especially the ‘property rich’ rule for indirect disposals.

Firstly, there is the issue of how HMRC will communicate these rules to a global audience; in extreme cases, a non-UK resident investor in a non-UK company can now be subject to UK capital gains tax.

Secondly, the qualifying asset test includes a complicated matching rule which can exclude some assets, and this will lead to the need for valuations for all qualifying assets, not just property assets.

Finally, and probably most worrying of all, is that some investors may find it difficult or even impossible to get information, from companies they have invested in, about UK commercial property that the company owns.

Other changes looming

The continued assault on the property sector does not stop here.

From 1 March 2019, the payment of Stamp Duty Land Tax and filing date for the return, will be 14 days after the transaction, rather than the current 30 days.

Also, capital gain tax due on the sale of UK residential property will be payable to HMRC within 30 days of completion, from April 2020, rather than the current deadline of 31 January following the end of the tax year in which the sale is made.

How we can help 

We are working with a number of individuals and businesses in preparing for the introduction of these new rules. If you are a non-UK tax resident who is affected by the new legislation, or believe it may have an impact on you, please contact a member of our tax team.