Non-UK residents now subject to tax on gains on commercial property

*A reference to property is to real property.

Clearly non-resident individuals and companies will want to consider their UK property portfolios as gains on UK commercial property are subject to tax. Given that the changes mean disposals of shares in property rich companies could also trigger a tax liability, advice should be sought regarding offshore structures with any UK property. It is important to understand whether entities within a structure are property rich and whether a disposal of shares will trigger a charge to tax in relation to gains within any underlying entities.

The position before the new rules

The approach to the taxation of gains is inconsistent as between UK residents and non-UK residents. UK residents are subject to UK tax on their worldwide gains. However, non-UK residents are not subject to UK tax on gains, not even gains made in the UK (unless the assets are used in a UK trade). The taxation of gains, made by non-UK residents, has been modified in recent years with the introduction of capital gains tax (CGT) for residential properties subject to the Annual Tax on Enveloped Dwellings (ATED) in 2013 and non-resident CGT (NRCGT) in respect of residential properties in 2015.

In an attempt to level the playing field between UK residents and non-UK residents, in relation to UK property at least, the new rules were enacted to come into effect at the beginning of 2019 tax year.

Taxation of gains of all UK property

It is noticeable that ATED related CGT and NRCGT brought residential property gains into the scope of tax but not gains relating to commercial property. The new rules subject gains on UK commercial property as well as residential property to tax.

Direct disposals will be caught as will disposals of shares in companies that hold substantial UK real property. The rules apply to companies as well as individuals.

Direct disposals

Gains made on disposals of an ‘interest in UK land’ will be subject to tax. Individuals will be subject to CGT and companies will be subject to corporation tax.

Indirect disposals

There will be a charge to tax where:

• there is a disposal of ‘substantial indirect interests’ in an entity; and
• that entity is ‘property rich’.

Substantial indirect interests

A non-UK resident investor (an individual or a company) will have a ‘substantial indirect interest’ in an entity where, in broad terms, they have 25% or greater investment. Investment has a broad definition and ownership structures need to be looked at carefully.

Property rich entities

A property rich entity is one that derives at least 75% of its value is from UK land. General tracing and attribution rules apply so that the value to UK land can be traced through a chain of companies, partnerships and other entities whether in the UK or not.

There needs to be careful consideration of the rules and property holding structures to understand if a disposal of an interest will give rise to a tax liability in relation to the gains of any underlying properties.

Tax rates

1 Rate depends on whether the individual is a basic rate or higher/additional rate taxpayer.
2 17% from 5 April 2020.

Rebasing

The new rules will only apply to gains made from the 5 April 2019. An election can be made to deviate from this default position to use the historic cost instead. This will make sense where the land has devalued and the historic cost is greater than the 2019 value. It should be noted that where an election gives rise to a loss rather than a gain, the loss cannot be offset against other gains for indirect disposals.

Reliefs and exemptions

There are some reliefs and exemptions which include:

• an exemption for disposals (direct or indirect) made by overseas pensions schemes and sovereign wealth funds
• an exemption for investors in a property rich company where all the UK land is for trading purposes and
• enhanced relief under the substantial shareholding exemption.

Repeal of ATED related CGT

As a side note, ATED related CGT has been repealed to make a complex area slightly less so.

What should non-UK residents with property interests do?

The expansion of the rules to tax gains realised by non-UK residents (individuals or companies) on commercial property as well as residential property is a significant change.

UK property holding structures should be forensically reviewed in light of the changes and careful thought should be given about how new property is purchased. In particular, advice should be sought on how the indirect disposal rules apply given the often complex structures through which commercial property has historically been held.