Overseas investors to pay capital gains tax on disposals of UK property and property rich entities – draft legislation and response to consultation provided
In the Autumn Budget last year, the Government announced a major potential change to the taxation of UK real estate. See our previous blog here.
Broadly, the UK does not currently tax non-UK investors on their disposal of UK commercial investment property or disposals of interests in entities which own UK property. This beneficial treatment will be lost for many from April 2019.
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
- interests in “property rich” entities.
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.
Although the core of the rules remain as previously proposed, HMRC have listened to some concerns from the real estate industry and have softened the rules slightly in some places. Examples of this include:
- option to rebase to actual cost, instead of April 2019 values, being available for indirect disposals. This was not going to be permitted under the original proposals and is a welcome addition, although a loss on disposal where this choice is exercised will not be an allowable loss.
- allowing non-resident companies which become UK resident on or after 6 April 2019 to benefit from rebasing to April 2019 values.
- a reduction of the look back period, from 5 years to 2 years, when determining whether an entity has held a 25% interest in a “property rich” entity.
- a provision allowing a holding of 25% or more during the 2 year period to be disregarded if the holding is for an insignificant amount of time. This will be particularly useful to seed investors.
- in relation to indirect disposals an exclusion from the definition of UK land for land involved in a trading business. The example given is a non-resident who disposes of shares in a retailer which owns shops of significant value.
- the abolition of ATED related capital gains tax.
In their response to the consultation (also published today) the Government acknowledge that the impact of the rules on the funds industry is ‘an extremely complex area that would require a significant amount of engagement with industry’. To this end, there will be further consultation on the precise application of the rules to funds and some preliminary proposals are included in the response which is promising. However, it appears that the introduction of these rules to funds will not be delayed notwithstanding these complexities.
Unhelpfully, the response to the consultation suggests that the Government consider there to be a strong argument that the exemption for holders of less than 25% of a property rich fund is not necessary. Not having the 25% threshold applying to property funds would be a significant departure from the original proposals and will no doubt be the subject of industry lobbying.
Finally, any hope for a new unregulated UK fund vehicle or the introduction of an Stamp Duty Land Tax (SDLT) seeding relief for onshoring would appear to be lost for the short term at least.
Corporation tax on UK property income of overseas companies
As expected overseas corporate landlords will be subject to corporation tax (CT) 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.
Financing costs will also be subject to a suite of unfamiliar CT rules on interest deductibility. In future they will have to familiarise themselves with the corporate interest restriction amongst other rules restricting deductibility.
Despite representations there is no grandfathering for existing debt. This could be an issue in particular with interest paid on debt with equity like features, e.g. it is results dependent, as CT rules can deny a deduction.
There are transitional rules to deal with the move to CT, which include:
- Capital allowances: there will be no disposal event, so there should be no balancing adjustments on the shift to CT.
- Existing income tax losses unused at 6 April 2020: these can be carried forward to the CT regime and offset against future UK property business profits. Such losses can be fully relieved rather than be subject to the 50% restriction introduced in April 2017 for CT losses, but they will not be available for use against other types of income or be surrenderable within a group.
- Derivatives: the legislation attempts to remove any asymmetries that could otherwise arise on the transition to CT in relation to the taxation of fair value movements on derivatives taken out for the purposes of the UK property business.
SDLT filing and payment deadline cut to 14 days with effect from 1 March 2019
As previously announced the deadline for filing an SDLT return and paying SDLT will be reduced from 30 days to 14 days for a land transaction with an effective date on or after 1 March 2019 or which becomes notifiable on or after that date.