More tax changes for non-resident UK property owners

19/02/2019

Non-resident individuals and non-resident companies and their shareholders face a raft of new changes that will bring nearly all UK property – whether residential or commercial, held personally or indirectly, such as via limited company shares – into UK capital gains tax charges. Careful planning will be needed before non-residents consider selling UK property or interests in companies that may have substantial property assets.

Extension of scope of non-resident capital gains tax (NRCGT)

Since April 2015, non-UK residents (both individuals and many non-resident companies) have been subject to capital gains tax (CGT) on a disposal of UK residential property. From April 2019, the legislation will be extended to cover disposals of non-residential land (i.e. commercial) and ‘substantial interests’ in UK ‘property rich’ entities referred to as ‘indirect disposals’.

Indirect disposals

For an indirect disposal to be subject to capital gains tax, the following conditions must be met:

• the disposal must be of a right or interest in a ‘property rich’ company – this is a company which, at the time of the disposal, derives 75% or more 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 or property. This is an investment of 25% or more held in the ‘property rich’ company at any time in the two years prior to disposal. The rule applies whether the investment is held directly or indirectly and whether the investment is held alone or together with certain connected parties.

Trading exemption

If the UK property is used for trading purposes throughout the year leading up to the disposal, and it is reasonable to conclude it will continue to be used for this purpose after the disposal, it will be exempt from non-resident CGT (NRCGT). For this reason, the rules will not apply to most investments by non-resident investors in UK retail and hospitality businesses.

Rebasing market value

Where an asset is brought into NRCGT for the first time because of these changes, it can be rebased to its April 2019 market value. This will ensure no gain arising prior to that date is subject to UK tax.

To avoid a delay in calculating the gain (and the tax due), you should document the value of the asset at 6 April 2019. This will prevent you from paying substantially more or less than necessary on account.

Assets already in the scope of NRCGT, such as UK residential property, will continue to be rebased to April 2015.

Filing requirements for individuals

The existing NRCGT 30-day filing requirement which applies to UK residential property, will be extended to include disposals of UK commercial property from 6 April 2019.

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.

Whilst the move to corporation tax means you will benefit from a more favourable tax rate (the UK corporation tax rate is currently 19% and expected to fall to 17% from 6 April 2020), there are some practical matters that might cause you difficulties and additional expense.

How we can help

Non-residents who review their property portfolio and plan ahead will be in the best position to make the most of these changes. It will be important to understand the value of your assets at the appropriate rebasing date and to understand the structure of any indirectly owned property assets before you consider selling them. The 30-day filing requirement means you will have to act quickly on completion to ensure your tax return is prepared and submitted in time, and any CGT payments made to avoid costly penalties.

For help and advice on property matters for non-residents please contact Paula Jeffs.