TAX ALERT: Non-Residents & UK Property

A number of changes to the way non-residents that hold UK land and property are taxed have been included in the draft legislation for Finance Bill 2018-19 and some of these are due to come into force in April 2019.

This article provides a brief overview of these changes and highlights some key points to consider, together with a reminder of key IHT changes that were recently brought in.

1. Extension of scope of Non-Resident Capital Gains tax

Since April 2015, all non-UK resident individuals, closely held companies (i.e. broadly under the control of five or fewer investors), trustees, personal representatives and funds have been subject to non-resident capital gains tax (‘NRCGT’) when disposing of UK residential property.

With effect from April 2019, the scope of NRCGT will be expanded to also cover disposals of:

• Non-residential (i.e. commercial) UK property; and
• ‘Substantial’ interests in ‘UK property rich entities’ – referred to as ‘indirect disposals’.

Non-resident diversely held companies, widely held funds and life assurance companies will also be brought into the scope of NRCGT for the first time from April 2019. All non-UK resident companies, including close companies, will be charged to corporation tax rather than capital gains tax on their gains.

Where an asset is brought into NRCGT for the first time as a result of these changes, it can be rebased to its April 2019 market value, ensuring no gain arising prior to that date is subject to UK tax. Assets already in the scope of NRCGT (e.g. UK residential property) will continue to be rebased to April 2015.

In light of these changes, the Annual Tax on Enveloped Dwellings (‘ATED’) related CGT will be abolished from April 2019, which provides a welcome simplification, however please note that the ATED charge will continue to apply.

2. Indirect disposals and NRCGT

The provisions for indirect disposals are intended to catch, for example, the situation where a non-resident sells shares in a company which holds UK land as an investment.

For an indirect disposal to be subject to NRCGT, the following conditions have to be met:

• The disposal has to be of a right or interest in a ‘property rich’ company – broadly one which, at the time of disposal, derives at least 75% of the total gross market value of its assets from interests in UK land; and
• The non-resident investor must have a ‘substantial indirect interest’ in the UK land – broadly at any time in the two years prior to disposal they (together with certain connected parties) had at least a 25% investment either directly, or indirectly, in the ‘property rich’ company.

However, if there are overseas property assets or other UK non-property assets then the ‘75% property rich’ test may not be met and the exemption for investment gains on indirect disposal should continue to apply.

3. Payments on account for residential property gains

This proposed change will affect both UK residents and non-residents who own residential property.

From April 2020, UK residents will be required to make CGT payments on account and file returns within 30 days of disposing of a residential property in a similar way as for NRCGT. The change will not apply where the gain is not subject to CGT (e.g. because it is covered by private residence relief).

For non-UK residents, the existing NRCGT 30-day filing and payment on account requirement will be extended:

• To apply to all companies from 6 April 2019; and
• To remove the exception for making a payment on account where a self-assessment return is filed for disposals on or after 6 April 2020.

4. Non-UK resident companies carrying on a UK property business

From April 2020, non-UK resident companies carrying on a UK property business will become subject to corporation tax rather than income tax.

This raises several practical issues:

• The corporation tax rules, including in particular the corporate interest restriction and other anti-avoidance provisions will apply, which could limit interest deductions to 30% of EBITDA. There is a carve out from these rules where properties are let to third parties and the borrowings are from a third-party bank.
• It is hoped that existing income tax losses will be can be set off against future property business profits chargeable to corporation tax, but will not be available for group relief or use against other profits and will have to be tracked separately.
• Non-resident companies will have to comply with the different filing and payment regime of corporation tax – including the requirement to submit returns and computations online in iXBRL format.

5. IHT and non-resident property investors

To extent to which Inheritance Tax (IHT) may be payable is determined by reference to the domicile of a taxpayer and not their residence, although long term UK residents may become deemed domiciled for UK tax purposes regardless of their actual domicile.

The Estate of anyone who is UK domiciled will be liable for IHT on worldwide assets. Until 5 April 2017 non-UK domiciled individuals were liable to IHT only on directly held UK assets. This was one of the primary reasons why non-domiciled investors acquired UK real estate through corporate entities, as the asset held was, for IHT purposes, the shares in the corporate entity and not its underlying assets.

This remains the case for investors in commercial property, and we understand that there are no current proposals to change this as part of the other changes highlighted in this note.

However, this is no longer the case for UK residential property, and associated financing arrangements.

From 6 April 2017 the following assets are now also within the scope of IHT.

1. the value of shares in offshore companies to the extent that the value is represented by UK residential property
2. loans (wherever made) to acquire or re-finance UK residential property; and security given for such loans

The rules for determining the extent to which assets are now liable are complex, and new anti-avoidance legislation has been introduced to prevent restructuring aimed at defeating these rules.

However, some practical steps can be taken to mitigate the impact of these rules and structuring new acquisitions of residential property may need more considered thought than may previously have been the case.

6. Action required

In view of the above changes it is important to consider whether existing offshore structures continue to be ‘optimal’ in terms of on-going running costs or whether either de-enveloping and holding the property directly or bringing the entities ‘on-shore’ to the UK would be more beneficial.

For further information, please speak to your engagement partner or Bas Kundu, Head of Property Tax at Simmons Gainsford, bas.kundu@sgllp.co.uk tel: 07545 300 334. For further details specifically on residence and domicile please contact Darren Hersey, Head of Tax, at darren.hersey@sgllp.co.uk tel: 020 7291 5620

Sept 2018

Disclaimer: this Tax Alert has been prepared for general information purposes only and does not constitute advice.