From April 2019, significant changes will be made to the taxation of UK real estate – meaning that if you are a non-resident holding commercial property within the UK, you will be subject to tax on any gains.
Tax for Non-Residents Holding Commercial Property: The ‘Old’ Rules
Until recently, capital gains tax was only ever applicable to UK residents. As such – wherever an asset was based – a non-UK resident would not have to pay tax on gains related to the disposal of such. Of course, this rule was tempered by certain anti-avoidance measures (prohibiting the use of non-UK companies and trusts for CGT purposes, for instance).
However, in recent years, CGT has been extended to specific non-residents holding residential property within the UK. The latest proposed change – which comes into effect from April 2019 – will affect the vast majority of non-resident owners of UK land and property: all forms of property investment by non-residents will be subject to CGT, and many of the previously-applicable exclusions will be removed.
Tax for Non-Residents Holding Commercial Property: The ‘New’ Rules
The exemption from UK capital gains tax represented a key benefit for foreign investors; as such, all relevant non-residents holding commercial property should be mindful of the upcoming changes and plan accordingly. The new rules include the following stipulations:
- From 6th April 2019, gains by individuals will be subject to UK capital gains tax (presently 20 per cent for additional/higher rate taxpayers). From 1st April 2019, gains by non-resident companies and unit trusts will be subject to corporation tax (presently 19 per cent).
- Historic gains will be protected. That said, increases in value arising after this date will be subject to tax – meaning that investors who held assets before the changes were brought in will likely pay some tax on disposal (which will be proportional to any increases in value).
- Also within the scope of the new tax rules will be indirect disposals – such as exits due to the sale of shares in property-rich vehicles (defined as an entity that derives 75 per cent of its gross asset value – or more – from UK land/property). Should the person making the disposal own (or has owned within the last five years) an interest equal or greater to 25 per cent in the vehicle, gains will be subject to tax.
- This also applies to non-resident individuals investing via collective investment entities (like REITs or unit trusts), provided that the above conditions are met. For non-resident entities that are part of a UK REIT group, things are a little more complicated: technically, this falls within the scope of the new taxation legislation, but will be treated as REIT exempt gains, meaning that any profits arising from such will need to be distributed as a property income dividend rather than a normal dividend. As a result, 20 PID withholding tax will be due.
- However, it may still be preferable to structure an exit in this way, as there are other benefits that may apply (a saving on SDLT, for instance, or relief via the substantial shareholding exemption).
- Do note, though, that double taxation treaties will have some bearing in certain circumstances – and, where applicable, these will supersede domestic legislation. As such it is worth seeking specific advice on your position from a qualified tax advisor.
Following the earlier changes to legislation, the extension of CGT to non-residents holding commercial property (thus covering all non-resident property investment) seems a logical step, and will bring the UK in line with many other countries. That said, the changes arguably remove some of the most attractive features of UK property to foreign investors – a group that currently holds a sizable share of commercial property within the UK. What impact this will have on the real estate market is yet to be seen.
If you’re feeling confused about current tax regulations or upcoming changes, or if you are seeking advice regarding your UK property holdings, feel free to contact IBISS & Co today. Specialists in tax advice and accountancy, our friendly, expert team will talk you through the latest legislative amendments, ensuring that you approach your affairs with confidence. With our help, you will soon have a tax strategy in place that will best serve both your individual interests and that of your business.