Major tax changes ahead for non-UK resident investors in UK property
Changes announced in the Autumn Budget 2017 introducing several significant changes in relation to the taxation of UK commercial property take effect in April 2019.
The change is currently proposed to apply to gains accrued on or after 6 April 2019. The intention is to align the UK with other countries and remove an advantage which non-UK residents have over UK residents by bringing all gains on non-residents’ disposals of UK property within the scope of UK tax.
There are two new charges:
Disposal of UK commercial property by non-UK residents
Capital gains tax for for non-UK residents currently only applies to disposals of UK residential property, introduced in April 2015. From 6th April 2019 capital gains tax will be extended to apply to disposals of any UK property.
Disposal of shares in “property rich” companies
Capital gains tax will also be imposed on the sale of shares of companies whose assets consist of, to a substantial extent, UK real estate (either residential or non-residential). Despite the introduction of non-UK resident capital gains tax to disposals of UK residential property in April 2015, the disposal of shares in property holding companies remained an option for non-UK investors. This will no longer be the case from April 2019, when the new rules will apply if:
- the company is “property rich” (i.e. if 75% or more of its value derives from UK property).
- the non-resident (and related partners) hold, or at some point in the previous two years have held, at least a 25% interest in the equity.
The above measures are in addition to the 2016, anti-avoidance rules introduced to counteract any claim that a development or dealing trade relating to UK property was actually being carried on outside the UK, and therefore not subject to UK tax. Profits from a development project are therefore within the scope of income tax or corporation tax, depending upon who is carrying it out. These rules also apply where there are arrangements to sell the development company, rather than the land itself. They apply where shares (for example) are sold and they derive at least 50% of their value from UK land.
As was the case with the introduction of non-UK resident capital gains tax for residential property, the acquisition cost of assets affected by the changes (both the direct and indirect charges) will be re-based to the value on the date on which the changes come into force. Alongside this provision the new rules provide that:
- a taxpayer can elect not to re-base, which might be helpful where, for example, property goes down in value;
- if the impact of the election is to create a loss, that loss will not become an allowable loss; and
- non-UK resident companies which subsequently become UK resident may still re-base.
Anti-forestalling measures are introduced from 22 November 2017 (Budget announcement) and a targeted anti-avoidance rule aims to prevent any perceived structuring around the new rules.
We would advise individuals who will come within the new measures to take action to have their commercial properties valued for rebasing elections.
There is an exception from the charge on disposals of certain property-rich companies. It will not apply to disposals of companies which derive their value from UK land used for trading purposes, other than to an insignificant extent, for example hotel chains and utility companies.
Tax on Rental Profit
Currently non-UK tax resident companies who do not carry on a trade in the UK are only liable to pay basic rate income tax (20%) on rental profits during their period of ownership of a UK commercial or residential investment property. They are not within in the UK corporate tax regime.
The Treasury has announced that it will bring non-UK resident companies with UK property income within the scope of corporation tax from April 2020. This will mean that UK rental profit will be subject to UK corporation tax at a rate of 17% (the anticipated corporate tax rate in April 2020). While the lowering of the tax rate is positive, falling under the UK corporation tax regime will mean that, from 2020, the UK’s corporate interest and loss restriction rules will be relevant to those with significant property portfolios (tax relief for corporate interest expenses is capped at £2m per annum and loss relief is restricted to a maximum of £5m).
Harbour Key Limited 2018