UK property ‘levelling the playing field’

By Lynette Chaudhary, International Tax & Research Director, STM Fiscalis Ltd

For UK property investors, changes have been proposed in UK Government consultation documents, which seek to extend the UK’s grip on the taxation of such property.

These target the taxation position of non-UK resident investors in all UK property, not just residential property, and therefore mark a fundamental change to how UK commercial property, owned by non-UK residents, is to be taxed in the UK.

The rationale has been described as a ‘levelling of the playing field’ in respect of UK resident and non-UK resident investors.  Whilst this might be a logical move, many non-UK resident investors are, in practice, unlikely to read UK consultation documents and may be unaware of what lies ahead.  This serves to raise awareness of these proposals.

The proposals

♦ In March 2017, it was announced that from April 2020, non-UK resident companies will be brought within the charge to UK corporation tax (CT) on their UK rental profits (currently liable to UK income tax) and gains on their disposals of UK residential property, currently liable to non-UK resident capital gains tax, (NRCGT).

A consultation has taken place on this and the UK Government plans to publish an explanatory note and draft legislation as a result of this consultation in the summer.

♦ More significantly, in November 2017 it announced that from April 2019, gains made on the disposal of all types of UK immovable property, directly or indirectly held, will be chargeable to UK taxation, regardless of the residency of the investor. This extends the existing rules that apply to UK residential property only, to UK commercial property (currently, non-UK resident investors are not liable to UK tax on UK commercial property gains).

Most property will be rebased from April 2019 so that only gains arising after that date are within the scope of UK taxation.

A consultation document was published in November 2017.  The consultation period ended on 16 February 2018 and at the time of writing we wait to receive a summary of the responses and the Government’s reaction to them.

For Gibraltar, these proposals mean that, for the first time, on the disposal of UK commercial property:

♦ Gibraltar resident individuals or trusts will be within the scope of UK capital gains tax (CGT) from April 2019, and

♦ Gibraltar resident companies will be within the scope of UK CT from April 2020 (and within the scope of CGT from April 2019 to April 2020).

Representations have been made to coordinate these start dates, so that they both commence from April 2020. This may have the added advantage of giving more time for the legislative detail to be considered.

Widening the scope

The introduction of NRCGT from April 2015 (as outlined in my article in Nov/Dec/Jan 2015/16 issue) marked a fundamental UK Government policy change, since the introduction of UK CGT in 1965 and its general exemption for non-UK residents.

These proposals seek to expand this scope. Currently, NRCGT applies only to disposals of UK residential property by non-UK resident individuals, trusts, personal representatives and closely-held companies, and only then where there is a direct disposal.  These proposals will bring widely-held companies within the charge to CT for disposals of UK residential property and will also bring indirect disposals of UK property (subject to certain criteria), within the scope of UK taxation – this being a further new development in UK taxation.

These changes will affect the investment in UK property that is undertaken through Collective Investment Vehicles (CIVs) and Real Estate Investment Trusts (REITs).  Whilst they will continue to benefit from current tax exemption on direct disposals, the rules for indirect disposals are expected to apply when the non-resident disposes of an interest in the CIV/REIT.

It is worth noting that there is currently and looks set to continue, a specific exemption from UK taxation for gains made by certain overseas pension schemes.

Next steps

These proposals will clearly expand the tax base of both UK CT and CGT and their impact will affect many, for example:

♦ Gibraltar resident companies renting out UK property, currently under the Non Resident Landlord regime filing UK income tax returns annually, will need to become familiar with the UK CT regime and its requirements. The good news is a lower tax rate should be charged on the rental profits, however any gains on any UK property will fall within the scope and the complexities of the UK CT regime need to be considered.

For Gibraltar resident companies already within the scope of Annual Tax on Enveloped Dwellings (ATED), it is proposed that this complex regime be harmonised, to the effect that ATED related gains, for companies, could become chargeable to CT.

♦ Gibraltar resident individual or trust owners of UK commercial property will fall within the scope and need to become familiar with the UK CGT regime and its requirements.

♦ All non-UK resident owners disposing of UK property will broadly need to report the direct or indirect disposal to HMRC within the tight timeframe of 30 days.

Keeping up to date with this rapid pace of legislative change can pose considerable challenges for non-UK residents.  They are often unaware of such developments and fitting into the UK’s Self-Assessment system can involve delays and difficulties.  Add to this that so much of the UK’s property taxation regime has been built on a piecemeal basis and the difficulties stack up!

Quite apart from these changes, the penalties associated with recovering lost tax where an offshore position exists are to be dramatically increased from 1 October 2018.