Changes to the taxation of UK real estate held by non-UK residents will mean that gains accruing from April 2019 onwards will now be charged to UK tax. Further to this, from April 2020, corporation tax also applies to non-UK resident corporate owners.
You can read our latest analysis of the tax changes published in December 2018 here.
Our article looks at the impact of these changes on:
- Non-UK resident investors
- Non-UK resident companies
- Real Estate Investment Trusts (REITs)
Non-UK resident investors – gains on direct property disposal
Alongside the Autumn Budget in November 2017, a consultation document was published that proposes an extension to tax on gains. Currently, gains on UK residential property are charged to tax in the hands of non-UK resident individuals and corporate investors that are not widely held.
The changes would mean that from April 2019, gains on any UK property, including commercial and residential properties owned by diversely held companies, will be chargeable to UK tax. Properties that are not already chargeable to tax will be rebased to market value in April 2019 for this purpose.
There will be some exemptions available to entities that would not be chargeable to corporation tax if they were a UK resident, an example of this is pension funds however, the full details of these exemptions are yet to be released.
Non-UK resident investors – gains on indirect disposals of properties
In many cases, disposals of UK commercial investment properties take place through a sale of the corporate entity owning the property rather than by a sale of the property itself. In most cases where non-resident investors sell shares in such companies, they are commonly not within the charge to UK tax.
It is proposed that from April 2019, gains arising to non-UK residents on the disposal of shares that derive their value from UK property investments may be charged to UK tax where certain conditions are met.
This will normally apply where the following two conditions are present:
- A sale of shares where the seller has held an interest of 25% or more in the company in the previous five years. Interests held by related parties would be aggregated for this purpose.
- At the date of disposal, 75% (or more) of the market value of the gross assets of the company represents UK land. No discount will be permitted in this calculation for outstanding liabilities (such as debt secured on the property).
For the purposes of calculating the gain on the disposal of the shares, the cost of the property would be rebased to the market value in April 2019.
UK domestic law cannot override double taxation agreements and certain jurisdictions may continue to allow the disposal of shares without a charge to UK taxation until the clauses within specific treaties are changed.
Widely drawn anti forestalling measures have been introduced from 22 November 2017, and these will operate so as to counteract arrangements undertaken prior to April 2019 in order to attempt to circumvent the charge. These arrangements will include moves by taxpayers to re-domicile their operations to territories with more favourable double tax treaties with the UK.
In order for HMRC to have full visibility of chargeable indirect disposals, it is proposed that certain UK advisers on such transactions will have a reporting obligation.
Non UK resident companies – corporation tax
In 2017, the Government consulted on a proposal to change the charge to corporation tax to include non-UK resident companies who are currently chargeable to income tax on rental business profits and non-resident capital gains tax on residential property gains.
It has been confirmed that this proposal will be implemented with effect from April 2020. This will mean that such companies will benefit from the lower rate of corporation tax of 17% from April 2020 (compared to the current income tax rate of 20%).
However, the rental profits of such companies will be calculated using corporation tax principles in the future rather than income tax principles. Consequently, new rules that took effect on 1 April 2017 for UK resident corporates, that restrict the use of brought forward losses and capping deductions for interest charges, will also apply to non-UK resident companies earning UK property rental income from 2020.
As a result of these changes, taxable rental profits may be higher under the corporation tax regime than they would have been under income tax rules.
Real Estate Investment Trusts (REITs)
Some of the changes already outlined in relation to the taxation of gains of non-UK residents could have an impact on the operation of the UK-REIT regime – for example, where the REIT has non-UK resident investors or itself has investments structured through non-UK resident entities.
From 2019, non-UK resident investors with a holding of 25% or more in a UK-REIT would be chargeable to UK tax on a disposal of their shares. Such a holding in isolation may be unlikely, particularly as prima facie; it would result in a corporate shareholder being a holder of excessive rights (10% or more). However, there may be cases where a larger shareholding has been fragmented, to which this would be applicable.
A gain on a disposal of a UK property by a non-UK resident company, which is owned by a UK-REIT, would also come within the REIT rules as a tax-exempt gain under the REIT regime, rather than as a gain exempt by virtue of having been realised by a non-UK resident company.
This will result in the distribution of such gains to shareholders by the REIT being treated as a property income dividend, potentially subject to withholding tax rather than as a normal dividend.
The position regarding a disposal of shares in a non-UK resident company within a REIT structure is likely to be complex.
There are many potential consequences of these proposed changes; some of these are highly complex. A number of questions are still unanswered by government and we will continue to keep abreast of any further developments and announcements.
We would be delighted to go through any of the above changes in more detail so please do get in contact for a more comprehensive conversation.