Taxation of property gains for non-residents
A new tax regime for non-residents disposing of UK land will soon be in force so that from 6 April:
- Non-residents disposing of all UK land, including commercial real estate as well as residential property, will be subject to UK gains taxes;
- Widely held companies will now be subject to UK gains taxes, (not just close companies), effectively bringing all corporate owners into the scope of tax on gains on all UK real estate;
- ATED related CGT will be abolished;
- All non-resident corporate owners disposing of UK land will be subject to corporation tax rather than CGT;
- Disposals of an interest in a UK “property rich” vehicle (broadly where at least 75% of its market value is derived from UK land) will be chargeable, unless the land itself has been used for UK trading purposes, both before and after the disposal, by a non-UK resident who (together with any connected persons) holds more than a 25% investment (directly, or through a series of other entities) in the property rich vehicle at any time in the two years prior to disposal; and
- Disposals by non-resident collective investment schemes (CIVs) of UK land will attract UK gains taxes, as will disposals of interests in non-UK resident property rich CIVs.
Who will be affected?
- Non-resident individuals and trustees planning to dispose of UK residential property will not be particularly affected by these changes as they would have been within the scope of non-resident CGT anyway for gains arising over the market value on 6 April 2015 and re-basing will remain as at this date.
- Any companies disposing of UK land will feel the effects of the new rules even if they are closely held companies disposing of residential property because going forwards there will be no ATED related CGT and any gains will be subject to Corporation Tax. (For these companies rebasing will be at 6 April 2015). At first glance this may seem an advantage because the current corporate tax rate is 19% and, at present due to reduce to 17% from 2020, which is lower than CGT rates. The switch to corporation tax may necessitate different accounting practices however, and there are various restrictions for instance on loss reliefs and the deduction of loan interest. The property income of non-UK companies holding UK property will also be subject to corporation tax, rather than income tax, but this will only take effect from April 2020. Property owning companies will therefore need to consider the impact of the new regime both on the cost of disposals and rental income going forward.
- Widely held companies and companies disposing of commercial property and individuals disposing of shares in property rich companies will be subject to UK gains for the first time and will be able to benefit from re-basing so that they will only be taxed on gains arising over the market value on 6 April 2019 of the shares or property disposed of, although alternative calculation methods are available if advantageous. It may be advisable to obtain a valuation as at 6 April 2019 now, so that it is on record should a disposal be anticipated in the future. The generous rebasing provisions may mean that these changes may not have a significant practical impact on those disposing of existing property/shares in the next few years, but the new rules may of course also have an impact on how new UK property purchases are structured going forward.