Changes to the taxation of UK real estate held by non-UK residents will mean that gains accruing from April 2019 onwards will be charged to UK tax. From April 2020, corporation tax applies to non-UK resident corporate owners.
Non-UK resident investors – gains on direct property disposals
Following consultation, draft legislation has now been published to implement an extension to the charge to tax on gains. Currently, gains on UK residential property are charged to tax in the hands of non-UK resident individual investors and non-UK resident corporate investors that are not widely held.
From April 2019, gains on any UK property, including commercial property and residential property owned by diversely held companies, will be chargeable to UK tax. Properties not already chargeable to tax will be rebased to market value in April 2019 for this purpose.
ATED-related capital gains tax, which has applied to some residential properties owned by companies since 2013, will be abolished from April 2019.
Some exemptions are expected to be available to widely held entities which would not be chargeable to corporation tax if they were UK resident, for example pension funds. The mechanism for this is subject to further consultation but one of the proposed ways that this can be achieved is for offshore funds to be able to elect for tax-advantaged status in exchange for complying with reporting obligations to HMRC. Elected status would give the fund exemption from tax on its own gains in proportion to the equity stake in the fund held by exempt investors. Investors would instead be taxable on gains they realise on a disposal of their interest in the fund. Exempt investors could then claim exemption from tax on such gains.
Non-UK resident investors – gains on indirect disposals of properties
Disposals of UK investment properties often involve a sale of the company owning the property rather than a sale of the property itself. In most cases, gains on such disposals are not currently taxable for non-UK resident investors.
Under the draft legislation, gains arising from April 2019 to non-UK residents on the disposal of shares which derive their value from UK property will be charged to UK tax where certain conditions are met. This will normally apply where both the following conditions are met:
- A sale of shares where the seller has an interest of 25% or more in the company. Interests held by related parties would be aggregated for this purpose and interests held in the previous two years would also be taken into account.
- 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).
Shares in such companies will be rebased to their market value in April 2019.
An exemption is available where both before and after disposal the company holds its interests in land for the purposes of a trade. This should mean that investments in property rich trading companies such as hoteliers and care home operators do not fall within the scope of the new rules.
Double taxation agreements
UK domestic law cannot override double taxation agreements and certain jurisdictions may allow the disposal of shares without a charge to UK taxation.
However, anti-forestalling measures took effect from 22 November 2017. These counteract arrangements undertaken prior to April 2019 in order to circumvent the charge, in particular non-residents seeking protection under beneficial double tax treaties.
Reporting of disposals
Under the draft legislation, gains arising to individuals will be chargeable to capital gains tax and gains arising to companies will be chargeable to corporation tax. Disposals will need to be reported to HMRC within 30 days of completion with a payment on account of the tax also being due on that date in most cases.
Non-UK resident companies – corporation tax
Alongside the charge to corporation tax on gains arising from April 2019, the draft legislation also provides for corporation tax (rather than the current 20% income tax charge) to apply to rental business profits of non-UK resident companies from April 2020. This will mean that affected companies will benefit from the lower rate of corporation tax of 17% that is expected to apply from April 2020.
However, rental profits would be calculated using corporation tax principles rather than income tax principles. In particular, this means that new rules which took effect on 1 April 2017 for UK resident companies restricting the use of brought forward losses and capping deductions for interest charges (broadly to 30% of Tax-EBITDA) will also apply to non-UK resident companies from 2020.
Real Estate Investment Trusts (UK REITs)
Some of the changes outlined above 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 companies.
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 is unlikely as it would result in the 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 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 an exempt gain 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. In particular, gains on the disposal of interests in Jersey Property Unit Trusts held via a non-UK resident holding company within a REIT structure may become taxable as residual income.
Non-UK REITs may be within special rules for collective investment funds (still under consultation). However, if not, non-UK REITs and their investors would be subject to tax on direct and indirect disposals in the same way as other non-UK resident owners of UK property.
Summary of recent and proposed changes
Introduction of UK tax on gains arising on residential properties held by non-residents where not widely held (augmenting ATED gains rules introduced April 2013)
Introduction of UK tax on gains arising on residential and non-residential property held by non-residents, unless held by a pension fund
Taxation of rental income from UK properties held in non-resident companies to be taxed under corporation tax rather than income tax rules