Non-residents and UK real estate
UK real estate held by non-UK residents has been subject to frequent tax changes over recent years. Until now, these changes have been largely confined to residential property. However, from 6 April 2019 non-residents are taxable also on UK commercial gains. Furthermore, drastic new rules have been introduced to tax the sale of shares in “property rich” companies.
UK real estate held by non-residents has been subject to frequent tax changes over recent years. Until now, these changes have been largely confined to residential property. However, from 6 April 2019 non-residents are taxable also on UK commercial gains. Furthermore, drastic new rules have been introduced to tax the sale of shares in “property rich” companies.
Before April 2013, nonresidents could sell UK land and property with no UK Capital Gains Tax (“CGT”) charge. Furthermore UK real estate could be removed from the scope of Inheritance Tax (“IHT”) by being held within offshore structures. The key changes to the property rules over the last six years are as follows:-
2012 – 15% Stamp Duty Land Tax (“SDLT”) introduced for purchases of UK residential property by companies
6 April 2013 – non-resident companies owning residential property subject to following taxes:-
- Annual income tax charge (“ATED”) as punishment for holding the property in a company
- ATED CGT at 28% (with rebasing to 5 April 2013 market value)
- Exceptions for property rental businesses and collective investment schemes
6 April 2015 – non-resident CGT (“NRCGT”) individuals, companies, trusts and partnerships subject to tax on the sale of residential property
- 20% for companies (with relief for indexation), 18%-28% for individuals, 28% for trusts;
- 28% in all cases where the ATED regime applies;
- Rebasing to 5 April 2015 market value;
- Exception for collective investment schemes.
6 April 2017 – IHT introduced for residential (but not commercial) property held within offshore structures
What has changed?
From 6 April 2019, the following changes have been introduced
- ATED-related CGT has been abolished. Capital gains realised by non-resident companies on UK real estate are now subject to corporation tax rather than ATED CGT. This effectively reduces the tax rate on disposals from 28% to 19%.
- The rebasing rules for the disposal of residential property by offshore companies have been simplified. Previously such properties were rebased to the 6 April 2013 market value. Under the new rules, any increase in value tween April 2013 and April 2015 is generally exempt from tax
- A direct disposal of UK commercial property by non-resident is now subject to tax at 10-20% for individuals and 19% for companies. The property is rebased to its 5 April 2019 market value, so any gains accruing before this is exempt from the new tax charge.
- A new tax charge is introduced for a disposal by nonresidents of a “property rich” company (or other entity) which owns, directly or indirectly, residential or commercial property. The tax charge is on the increase in the value of the shares which have been sold, rather than the increase in the value of the underlying land. The tax rate is 19% if the vendor is a company, 20% for a trustee and 10-20% for an individual. This applies irrespective of whether the underlying property is residential or commercial.
- Non-UK residents (excluding companies) must file a CGT tax return within 30 days of the completion date for both direct and indirect disposals of UK land. In addition, payment of the CGT is also due within 30 days, although until 5 April 2020 individuals can defer payment where they are already filing self assessment tax returns.
The new tax charge on the sale of “property rich” companies is complicated. Very broadly, two conditions must be satisfied in order for a tax charge to arise:-
i) the vendor must hold 25% or greater interest in the company at the time of the disposal, or at any time in the previous two years
ii) at least 75% of the market value of the company’s “qualifying assets” must be derived directly or indirectly from interests in UK land. This test is applied at the time the non-resident sells shares in the company. Unlike for the 25% test, is not necessary to apply the test over the previous two years.
There are various exemptions from the charge, for example
- Where it is reasonable to conclude that the real estate was used in a qualifying trade for at least a year for the disposal, and will continue to be used in this way.
- A disposal of shares in a property rich trading company will continue to be exempt under the existing substantial shareholding exemption (SSE), which generally applies to trading groups where the holding was at least 10% and has been held for at least 12 months in the six years prior to the disposal
Impact on property funds
Special rules apply to collective investment vehicles which are diversely owned. For example, the fund may elect to be treated as transparent, and the fund can elect for a special tax exemption provided that certain conditions are satisfied.
The rules incorporate a targeted anti-avoidance rule designed to defeat any planning entered into where the main purpose is to avoid tax charge under the property rich rules.
Non-resident investors will need to consider their exposure to the new tax and may wish, in certain circumstances, to explore de-enveloping or restructuring options. This is not necessarily straightforward, since there could be more than one layers of UK tax on the same economic gain – for example, a tax charge at the company level, a further tax charge on a disposal of shares in the company, as well as potential SDLT exposure.
The government is also consulting on the introduction of an additional SDLT surcharge of 1% for non-resident purchasers of UK residential property. This would result in a maximum possible SDLT charge 16%.
UK commercial real estate can still be structured to be outside of the scope of UK IHT. However, this could be a target for further change.