The UK property market has been a favourite for offshore investors for many years. New tax charges for residential property were introduced in April 2015 and are being extended from April 2019 to all types of UK property, including commercial. If you have any UK property interests you need to understand the new disclosure rules and how the tax charges will be imposed.
The changes will ensure that all gains accruing on disposals of interests in UK property (land and buildings) will become chargeable to UK Capital Gains Tax. The precise details of the changes are still subject to consultation, but the UK government has set a precedent in the taxation of the UK residential property. Extending those rules to commercial property and land will be relatively simple.
Since April 2015, a disposal of UK residential property owned by non-UK residents has required disclosure to HMRC and potential payment of Capital Gains Tax. The new proposals extend these regulations to include the disclosure and potential payment of tax on the disposal of any UK real estate, whether commercial or residential. There will be continued exemptions for non-UK pension funds and other entities which are exempt for reasons other than residence status or because they are outside the scope of tax. Individuals and private equity investments will consequently all be subject to the new rules.
The proposed changes
The proposals not only treat the disposals of commercial property in a similar way to residential property, but will also extend the rules for residential property to indirect sales and disposals made by non-close companies. A close company is broadly one controlled by five or fewer shareholders.
An indirect sale is a transaction where the subject matter is an entity that is ‘property rich’ in that 75 percent or more of its gross asset value (i.e. excluding loan finance) at disposal is represented by UK real estate. A tax charge will be triggered where a person holds, or has held at some point within the five years prior to disposal, a 25 percent or greater interest in the entity being sold.
What is the current Capital Gains Tax regime for UK property?
Two Capital Gains Tax regimes currently apply to non-UK residents who own UK residential property. One is the gains relating to Annual Tax on Enveloped Dwellings (ATED), which applies to companies owning UK residential property worth more than £500,000. The second regime is the Non-Resident Capital Gains Tax (NRCGT). Neither of these regimes currently applies to indirect transactions in property.
One of the positive results from these proposed changes is that there will be one regime in operation, making it simpler to understand and to comply.
The current rates of tax applied are up to 28 percent for individuals and trusts within NRCGT, while for companies the rate is 20 percent. ATED-related gains are charged at a flat rate of 28 percent.
What action should be taken?
The UK tax authorities are wise to artificial arrangements aimed at circumventing the rules and certain provisions were introduced on Budget day in November 2017. Proposals were announced that will deny protection via tax treaties such as the Luxembourg treaty which does not allow the UK to tax such gains.
Rebasing of property values is available regarding non-residential property. This will result in only the gains attributable to the growth in value from 1 April 2019 (for companies) or 6 April 2019 (for other persons) being chargeable to tax.
If rebasing produces an unfair result, for direct disposals only, it is possible to compute the loss or gain on disposal using the original acquisition cost as the base cost of the property.
For those already in the NRCGT regime, April 2015 remains the rebasing point for those directly holding interests in residential property.
The disclosures that will be required, even where no tax charge accrues, may be the responsibility of any UK-based adviser involved in the transaction. The measures will apply to those within the Self Assessment regime as well as the Corporation Tax regime.
Penalties as well as interest may be applied to those not reporting and paying tax at the correct time. Current rules only allow 30 days for the transaction to be reported and, where non-residents are not within the UK Self Assessment regime, to also pay any tax due. These timeframes will continue. In addition, any transactions falling within the Corporation Tax regime will require the non-resident to register for Corporation Tax Self Assessment with HMRC and to return the disposal within that regime.
Where a non-resident does not meet the condition of owning 25 per cent or more of a ‘property-rich’ entity at the time of disposal or within five years prior to that date, no UK disclosure is required.
Transactions involving UK property can be complex and these new requirements may trip up the unwary. Even if you are not currently considering disposing of your UK property holdings, review your investments and understand your obligations in case you do decide to sell.
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