Overseas investors to pay capital gains tax on disposals of UK property and property rich entities
In the Autumn Budget last year, the Government announced a major potential change to the taxation of UK real estate, with further detail in July of this year. The next major announcement is expected on 7 November, but a document released today gave a few tantalising additional details of what is to come.
- Broadly, the UK does not tax non-residents: (a) on their disposal of UK commercial investment property (and certain non-residents are also exempt on their disposals of residential property too); or (b) on disposals of interests in entities which own any UK property. This beneficial treatment will be lost for many from April 2019.
- The new non-resident CGT rules will apply to gains arising from April 2019 onwards (i.e. pre-April 2019 gains should not be subject to charge).
- Under these proposals, non-residents will be chargeable on their gains from disposals of:
- UK property (“direct disposals”) ; and
- interests in “property rich” entities (“indirect disposals”).
- 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 has held a 25% or greater interest in the entity at any point in the 2 years ending on the date of disposal. There will be an option to rebase to actual cost, instead of April 2019 values, being available for both direct and indirect disposals.
- For indirect disposals, there is an exclusion from the definition of UK land for land involved in a trading business, meaning that trading groups holding such land may not be property rich, and so not subject to the charge. The example given is a non-resident who disposes of shares in a retailer which owns shops of significant value.
- ATED related capital gains tax is to be abolished.
Full details of the proposals will not be revealed until 7 November, when HMRC publish revised draft legislation, including the much-awaited proposals for funds. However, a document released today gave a few tantalising details of what is to come:
- Excitingly for REITs, the document confirms that for a property rich UK REIT, gains on disposals of UK property rich entities will be exempted from capital gains tax. Presumably, this measure is being introduced to provide parity of treatment with the expected exemption for tax on indirect disposal under the elective regime that HMRC has previously trialled in respect of offshore funds. No details of this latter exemption are given in the document but these will hopefully be provided on the 7 November.
- There was confirmation that the 25% ownership threshold would not apply for non-residents investing in UK property rich “collective investment vehicles”. There was no direct indication as to what is meant by a “collective investment vehicle”, but as noted below, it is likely to include any vehicle that is either a “collective investment scheme” or an “alternative investment fund”.
- The recent tax treatment of “tax transparent investment funds” (notably JPUTs) has been subject to a degree of uncertainty. The new document shows HMRC’s proposed response to this is a potentially wide-ranging provision to deem any vehicle that is either a “collective investment scheme” or an “alternative investment fund” to be a company for capital gains tax purposes meaning that they would fall within the provisions.
- The document notes that partnerships (which might otherwise fall within this provision) are specifically excluded. An exclusion presumably will also be required for CoACS (co-authorised contractual schemes), but this is a detail not mentioned in the document. More difficult will be the status of vehicles like FCPs (i.e. a “Fonds Commun de Placement”, typically in Luxembourg or France) and other similar non-UK vehicles.
For further information, please sign-up here to attend BCLP’s seminar on these changes on the 13 November.
Corporation tax on UK property income of overseas companies
As expected, overseas corporate landlords will be subject to corporation tax on their UK property income from 6 April 2020, including where they invest via a tax transparent collective investment vehicle. This will mark a departure from the current income tax charge and is a further levelling of the playing field between UK resident and non-resident corporate landlords. This extends to profits arising from loan relationships or derivative contracts that the company is a party to for the purposes of that business, or to enable it to generate that income, respectively.
Draft legislation was released today containing the details of how non-resident companies will be brought within the scope of UK corporation tax from 6 April 2020 and investors should now consider what this means for their holding structures and the impact of any transitional arrangements.
New Structures and Buildings Allowance
A new Structures and Buildings Allowance (“SBA”) has been announced for expenditure incurred on or after 29 October 2018, on new non-residential structures and buildings intended for commercial use. The cost of works to bring structures and buildings into existence and to improve existing structures and buildings will be eligible, as well as the costs of conversion of a building for use in a qualifying activity. SBA can be claimed separately to capital allowances on plant and machinery.
SBA will be available to businesses which are carrying on a qualifying activity (e.g. property letting or otherwise using the property as capital asset in the course of its trade or business). SBA will be available at a rate of 2% per annum on a straight-line basis, over a fixed 50-year period, regardless of ownership changes and starting from when the structure or building comes into qualifying use.
No expenditure on land (or in respect of rights relating to the land) or dwellings (which includes student accommodation or PRS buildings) will be eligible for the relief and for properties where there is mixed use, the relief will be reduced by apportionment (subject to a de minimis). If relief is not claimed, it will not be able to be carried forward to a later period and will be lost. There will be notional allowances for businesses that are not within the charge to UK tax.
Where SBA is claimed, a person’s allowable cost for chargeable gains purposes on a disposal will be reduced by the total amount of relief that they have claimed. In order to transfer the benefit of allowances, businesses will need to keep records of the expenditure incurred on the works and that attributable to the land. Relief will not be available for structures or buildings where a contract for the physical construction works is entered into before 29 October 2018 and anti-avoidance rules will apply to prevent manipulation of the rules.
In a move to help the high-street, business rates will be cut by one-third for retail properties with a rateable value below £51,000. This is expected to benefit up to 90% of all retail properties and will apply for 2 years from April 2019.
Reduction in rate of writing down allowances
However from April 2019, the special rate of writing down allowance for qualifying plant and machinery will fall from 8% to 6%.
Additional SDLT for overseas buyers of residential property
Theresa May’s much publicised increased SDLT for foreign buyers of property failed to materialise in any detail today. The Government has instead announced that in January 2019 it will undertake a consultation on a 1% surcharge for non-residents acquiring residential property in England or Northern Ireland (property in Wales and Scotland are excluded).
It is not clear whether such a measure would be compliant with the EU rules of “free movement of capital” and implementation may have to wait until the EU single market rules no longer apply to the UK. This may be addressed in the consultation.
The consultation is stated as applying to residential property only. As large (6 properties or more) deals use commercial rates, this change may have less impact on large property companies although may affect their target market.