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In the Chancellor’s budget on 22 November 2017, it was announced
that non-residents will become subject to UK tax on all gains
realised on disposals of all types of UK immovable property. The
proposed changes will extend the current capital gains tax (“CGT”)
regime for non-residents by bringing into charge gains realised on
disposals of non-residential (commercial) property. The changes,
which are expected to be introduced from April 2019, will affect all
disposals of UK property thereafter.
The UK government has issued a consultation on the proposed
changes, the outcome of which is expected to be published in the
spring of 2018. This measure is intended to align the disposals of
all UK immovable property made by non-residents, with that of UK
residents.
In addition, the proposed changes will not only capture direct
disposals of UK property, but they will also potentially capture any
indirect sales of UK property (certain sales of company shares
containing enveloped UK property).
Direct disposals
Under current legislation non-residents are subject to capital
gains tax on a gain realised on the sale of UK residential property
under the Non-Residents Capital Gains Tax regime (“NRCGT”)
or the Annual Tax on Enveloped Dwellings CGT regime (“ATED-
related CGT”). However, gains realised on the disposal of UK
commercial property are currently outside the scope of CGT for
non-residents.
The new rules, which bring commercial property sales into charge
from April 2019 onwards, are expected to create a single tax
regime for non-residents who dispose of UK immovable property.
In relation to disposals of UK commercial property, the relevant
gain subject to tax will be limited to any appreciation in the
property’s value that accrues from April 2019 to the date of sale.
Thus, commercial property sales will benefit from rebasing which
will require property owners to obtain a valuation of any relevant
commercial properties as at April 2019.
In addition to extending the net to capture disposals of commercial
property, disposals of residential property made by widely-held
non-resident companies (who are currently exempt from CGT) will
be brought into charge.
The applicable rate of tax for non-residents that will apply on
a sale of UK property from April 2019, will broadly be similar to
that would apply if the disposal was made by a UK resident. Thus,
insofar that the relevant non-resident owner is a body corporate,
any gain realised on the sale of UK immovable property will be
subject to corporation tax, and if the sale is made by a non-
resident individual, trust or personal representative, the charge
will be subject to CGT.
Indirect disposals
Indirect disposals of UK immovable property will be brought into
the scope of charge for non-residents from April 2019. The new
rules will look to capture any transactions of an interest in an
entity that holds UK immovable property insofar that the entity is
“property rich” and, if at the time of disposal (or at some point in
the five year period prior to the disposal), the non-resident seller
held at least a 25% interest in that entity.
LTS-TAX.COM
2018 UK Budget Bulletin - Taxation of gains on UK commercial property
2018 UK Budget Bulletin - Taxation of gains on UK commercial property
This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice You should not act upon the information contained in this publication without obtaining specific professional advice. No liability is accepted for any direct or consequential loss arising trom the use of this document. LTS Tax Limited (registration number 54292) is registered with the Chartered Institute of Taxation as a firm of Chartered Tax Advisers. LTS Tax Limited is licensed by the Guernsey Financial Services Commission. Please see our website www.lts-tax.com for details.
Registered office: Les Echelons Court, Les Echelons, St Peter Port, Guernsey, GY1 1AR.
LTS Tax Limited
PO Box 20, Les Echelons Court, St Peter Port, Guernsey, GY1 4AN
T: +44 (0)1481 755862 F: +44 (0)1481 713369
www.lts-tax.com
Property rich transactions will be in point if, at the time of disposal,
directly or indirectly, 75% or more of the value of the assets
disposed of derives from UK land. The 75% test will be based on
the gross asset market value of the entity at the time of disposal,
thus excluding liabilities such as loan finance.
The 25% ownership test is designed to exclude minority investors
from the charge. The ownership test will consider the proportion
of interest held in the property rich entity by the non-resident (and
related parties) as at the point of sale. However, when considering
the relevant interest, the non-resident will also be required to look
back five years prior to the disposal to see if the ownership test
was met at any time during that period.
Corporation Tax
It was announced in the budget that with effect from April 2020
non-resident property holding companies will become subject
to the UK Corporation Tax regime, rather than Income Tax. This
means that income and gains will be taxed at 17%, which is lower
than the current Income Tax rate of 20%, although up until April
2019 gains on commercial property would have been fully outside
the scope of UK tax.
In addition, although the proposed rate of Corporation Tax in 2020
is lower than the current rate of Income Tax, it is likely that due to
restrictions which apply to the Corporation Tax regime on interest
relief and loss relief, the tax liabilities on rental income under
Corporation Tax are likely to be higher for a significant number of
commercial property investors.
Furthermore, UK companies have been able to benefit from an RPI
related indexation relief since March 1982 when calculating gains.
This relief however is being frozen as at 31st December 2017
and any gain arising thereafter will be fully subject to tax with no
deduction for inflation.
Conclusion
Whilst many of the proposed changes referred to above are
subject to a period of consultation, it is understood that the new
tax regime will be introduced and the consultation is therefore
likely to focus on implementation rather than principle.
These new proposals are going to have a significant effect on non-
resident property investors. Tax liabilities are likely to increase
and the added complexity of the UK Corporation Tax reporting
regime will add to the costs of compliance. It is far too early to
judge what effect this legislation will have on the UK commercial
property market as a whole, but if the changes made in the past
few years to the taxation of high value UK residential property are
anything to go by then we could be in for a rocky ride.
If you have any queries please contact:
Paul O’Neill CTA
Managing Director, LTS Tax Limited
DD: +44 (0)1481 755882 T: +44 (0)1481 755862
Simon Graham CTA
Director, LTS Tax Limited
DD: +44 (0)1481 755880 T: +44 (0)1481 755862
Francis Snoding CTA
Director, LTS Tax Limited
DD: +44 (0)1481 755881 T: +44 (0)1481 755862
Mandy Connolly CTA
Head of Tax Technical, LTS Tax Limited
DD: +44 (0)1481 755872 T: +44 (0)1481 755862
Luke Harding ATT CTA
Tax Manager, LTS Tax Limited
DD: +44 (0)1481 755867 T: +44 (0)1481 755862