In the Autumn Budget 2017, the UK Chancellor unexpectedly announced proposals to tax gains made by non-residents on UK commercial property with effect from April 2019. This will have a significant impact on non-UK investors into UK real estate.
Non-UK investors to pay capital gains tax on disposals of all UK property – including commercial property - and interests in property rich companies/entities
Currently, non-UK resident investors (whether individuals or companies) are subject to UK tax on gains realised on the disposal of UK residential property but not on the disposal of UK commercial investment property or on disposals of interests in non-UK entities which own UK property (residential or commercial). This looks set to change from April 2019.
Under the proposals, from April 2019:
- non-UK residents will be taxed on gains arising from the disposal of:
- a UK property – residential or commercial; and
- a direct or indirect interest in an entity where more than 75% of the gross asset value of the entity derives from UK land or property, if the non-resident making the disposal has held at least a 25% interest in the entity at any point in the 5 years ending on the date of disposal
- widely-held non-UK companies will be subject to tax on gains arising on disposals of all UK property (such companies are not currently subject to non-resident capital gains tax (NRCGT) on disposals of UK residential property). There will be further consultation on the impact of these changes on the funds industry and disposals of interests in fund
- the rules will only apply to gains arising from April 2019 onwards – i.e. rebasing will apply so that pre-April 2019 gains should not be subject to charge (unless the non-UK resident chooses to use the original acquisition cost in calculating the gain which may be beneficial if a loss has been made over the entire ownership period but a gain would accrue if the property was rebased to April 2019). Note, for disposals of directly held residential property that are already subject to NRCGT gains arising from April 2015 will continue to be subject to tax
- rates of tax
- individuals (and trustees) will be taxed at 28% where the gain relates to residential property and 20% where the gain relates in non-residential property
- companies will be taxed at corporation tax rates – currently 19%, but falling to 17% in April 2020
- non-UK investors in certain jurisdictions will not be subject to the rules - this will depend on the terms of the relevant double tax treaty
- there will be some exemptions, for example pension funds and sovereign wealth funds
- anti-forestalling rules apply from Budget day (22 November 2017) (dealing with tax treaty abuse) and there will be a targeted anti-avoidance rule.
Corporation tax on rental income of non-UK resident companies from UK real estate
From April 2020, non-UK resident companies will be subject to UK corporation tax (rather than income tax) on their income from UK property. By April 2020 the rate of corporation tax should be 17%, in contrast to an income tax rate of 20%, however the new corporate interest restriction (which restricts interest deductibility) will apply.