Overseas investors to pay capital gains tax on disposals of all UK property and property rich companies/entities
The Government announced a major potential change to the taxation of UK real estate today which will come as a shock to the industry.
Broadly, the UK does not currently tax non-UK investors on their disposal of UK commercial investment property or disposals of interests in non-UK entities which own UK property. This beneficial treatment looks set to be lost from April 2019.
The Government is consulting on whether to bring disposals of commercial property by overseas investors and disposals of interests in property rich entities (e.g. overseas companies or JPUTs) within the charge to UK corporation tax (for companies) or capital gains tax (for individuals and other entities). The language of the consultation indicates that this measure is going to come into force and it is merely the detail of the measure which is open to consultation.
In summary, the proposals are:
- the rules will apply to gains arising from April 2019 onwards (i.e. pre-April 2019 gains should not be subject to charge);
- non-residents will be chargeable on their gains from disposals of:
- UK property; and
- direct or indirect interests in “property rich” entities (see further detail below);
- gains will be calculated on the value of the interest disposed of (i.e. the value of the property on a direct disposal or shares/units on an indirect disposal);
- gains will be subject to tax at either the capital gains tax rate for individuals (currently 20% for non-residential or 28% for residential property) or corporation tax rate for companies (currently 19%, falling to 17% in April 2020);
- certain jurisdictions will not be subject to the rules. This will need to be assessed on a country by country basis and will depend on the terms of the double tax treaty. The current Luxembourg treaty, but not the Jersey or Guernsey treaties, may prove helpful for disposals of indirect interests, subject to the anti-forestalling and anti-avoidance rules mentioned below;
- there will be exemptions for entities which are exempt from UK capital gains (such as certain pension funds or sovereign wealth funds);
- anti-forestalling rules apply from today (dealing with Tax Treaty abuse) and there will be a targeted anti-avoidance rule;
- these changes will have a material impact on the way our clients structure their investments in UK property and may lead to an increased utilisation of onshore property owning structures where appropriate (e.g. REITs, PAIFs, ACSs and Investment Trust Companies) – the Government has said it will be looking at whether changes to the REIT regime are required to prevent avoidance;
- there will be further consultation on the impact on the funds industry and disposals of interests in funds;
- these changes will mean losses and reliefs (such as the substantial shareholding exemption for institutional investors) become relevant to and important for non-resident investors; and
- the above consultation also announces a change to the way capital gains tax applies to residential property as it proposes the removal of the exception from non-resident CGT for widely held companies from April 2019 and will also bring indirect disposals of residential property into the charge to tax.
The rules will apply to indirect disposals of property where the:
- entity being disposed of is ”property rich”. This will apply where 75% or more of the gross asset value of the entity being disposed of derives from UK land; and
- non-resident holds a 25% or greater interest in the entity or has held more than 25% at any point in the 5 years ending on the date of disposal.
There will be detailed rules around how the 25% is calculated and interests of associates will be counted.
Corporation tax on rental income of non-resident companies from UK real estate
The Government has confirmed that non-resident companies will be subject to UK corporation tax (rather than income tax) on their income from UK property, but this change will be introduced later than expected. It will not be introduced until April 2020. The upside in the delay is that the new corporate interest restriction (which restricts interest deductibility), the hybrid mismatch rules (similarly) and the rules that limit the ability of carried forward losses to shelter profits (to 50% of profits each year) will not apply until April 2020. However, non-resident landlords will have to wait until that date to benefit from the lower rate of tax. By April 2020 the rate of corporation tax should be 17%, in contrast to an income tax rate of 20%. Overseas investors may need to look again at their financing arrangements to check they still work from April 2020.
Corporate interest restriction – improvement to the infrastructure exemption
The Government has announced improvements to the infrastructure exemption for the new corporate interest restriction. The exemption applies where buildings which are part of a UK property business are let on a short-term basis to third parties. The Government has indicated that it has listened to cries from industry to allow the election to be revocable when property is sold to a third party. However, it will be important to check that the drafting covers both direct and indirect sales of the property.
SDLT – relief for first time buyers
Stamp duty land tax will be abolished for first time buyers acquiring residential property for up to £300,000. There is also relief for first time buyers buying residential property for £500,000 or less. For them the first £300,000 of their purchase price will not attract stamp duty land tax. The remaining amount between £300,000 and £500,000 will be taxed at 5%. These changes will apply to transactions with an effective date on or after today.