Whilst not mentioned in the Chancellor’s statement, the Budget documents reveal the Government’s intention to bring offshore residents within the scope of UK tax on gains on commercial property from April 2019. UK tax will also be extended to indirect disposals of both commercial and residential property, and the existing exemption from the charge on the disposal of UK residential property by widely-held companies will also be removed. The details of the proposals are set out in a consultation which can be found here.
We are still evaluating the full impact of the proposals but set out a brief outline below.
The consultation document states that from April 2019 tax will be charged on gains made by non-residents on disposals of UK commercial property. Non-UK companies and other bodies corporate will become subject to corporation tax and individuals will become subject to capital gains tax.
UK tax will also be extended to indirect disposals of interests in UK commercial or residential property. The charge will apply on the disposal of an interest in a “property rich” vehicle, being an entity which derives, directly or indirectly, 75% or more of its value from UK land. The new charge will not apply to investors which hold (when taken together with connected persons) less than 25% of the vehicle, although the 25% test will be based on the largest interest held during the five year period prior to the date of disposal.
The consultation states that only the gains attributable to changes in value from April 2019 will be chargeable. This will be achieved by rebasing commercial property (and residential property held by widely-held companies) to the value at April 2019 for the purposes of calculating the gain on disposal. Similarly, disposals of shares or other interests in property rich vehicles will be limited to the growth in value from April 2019.
The consultation acknowledges that the impact on non-residents investing through collective investment vehicles, such as REITs, will need to be carefully considered.
The above changes will have a major impact on offshore investors in UK property. Only those with a general exemption from UK tax, such as pension funds and sovereign wealth funds, look to be outside the scope of gains on UK property from April 2019.
A key challenge for the Government in enforcing the rules will be obtaining details of disposals of interests in non-UK vehicles and collecting the tax. The consultation proposes that UK advisors will be required to report details of such disposals. However, the UK’s tax treaties with some jurisdictions do not permit the UK to tax disposals by non-UK residents of interests in property-holding vehicles even if the property is in the UK. Accordingly, non-residents based in these jurisdictions will remain outside the scope of the new charge when making indirect disposals of UK land, although the consultation explains that rules will be introduced to prevent “treaty shopping” and the new OECD multilateral instrument will also result in the tax treaties between many countries being updated.