November 16, 2018An Equerry update on taxing gains made by non-UK residents on UK immovable property
The Government has now confirmed that from April 2019 non-UK residents will be subject to tax on disposals of all UK property. Currently non-UK residents are only taxable on disposals of UK residential property.
All non-UK resident persons’ gains on direct disposals of UK land will be chargeable. The rate of tax will be the same as for UK residents (e.g. the normal CGT rates will apply to individuals and the corporation tax rate will apply to companies).
Indirect disposals of UK land by non-UK residents will also be chargeable. This applies when a non-UK resident investor disposes of an interest in ‘property rich’ entities (such as companies, partnerships and property unit trusts) and at the date of disposal, or at any point in the two years prior to that date, the non-UK resident holds, or has held, a 25% or greater interest in the entity.
A ‘property rich’ entity is one that derives 75% or more of its gross asset value from UK property. However, a trading exemption applies, to avoid real-estate rich trades, such as retail and hotel chains and utility companies, falling within the scope of a property rich entity.
The Government will counter tax advantages where arrangements have been entered into to avoid, or benefit from, these rules.
In response to a number of concerns raised in relation to the impact on funds with UK real estate investments, the Government said, in July, that it was exploring, with relevant stakeholder groups, how best to produce a set of special rules that address both:
- The impact on exempt investors in offshore funds, where the rules as proposed could cause them to be taxed at the level of subsidiary holdings; and
- The potential for economic double taxation, due amongst other things to the indirect disposal rules, when disposals are made at a lower tier of a fund structure and the proceeds passed up to investors.
The Government has now said that the legislation originally published on 6 July will be updated to cover the new rules as they will apply to collective investment vehicles.
These funds, other than partnerships, will be treated for the purposes of capital gains as if they were companies and so chargeable to Corporation Tax.
An investment in such a fund will be treated as if the interests of the investors were shares in a company, so that where the fund is UK property rich, a disposal of an interest in it by a non-UK resident investor will be chargeable to UK tax under these new provisions.
Other rules specific to funds will be detailed in a Technical Note due to be published on 7 November 2018, including the transparency and exemption elections.
Where a UK Real Estate Investment Trust is UK property rich, its gains on disposals of UK property rich entities will be exempted under the same mechanism as disposals of property under the existing legislation.
Interaction with the ATED rules
Where the Annual Tax on Enveloped Dwellings (ATED) applies to a property, CGT is payable when the property is sold. ATED-related CGT is payable mainly by companies that own UK residential property valued at more than £500,000.
The Government has also confirmed that the ATED-related CGT provisions will be abolished.
Equerry Investment Management is a trade name of Raymond James Investment Services Limited (Raymond James) utilised under exclusive licence. Raymond James is a member of the London Stock Exchange and is authorised and regulated by the Financial Conduct Authority. Registered in England and Wales number 3779657. Registered Office Broadwalk House, 5 Appold Street, London, EC2A 2AG.