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Effect on overseas investment by non-resident capital gains tax for UK commercial property

Factors such as a constant and stable capital growth, reliable rental income, positive exchange rates and regulations have historically made the UK commercial property market a very attractive investment. Historical tax incentives also made the market a lucrative option but the tax rules have changed and not for the better.

Levelling the playing field

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In the past, overseas investors were completely exempt from UK Capital Gains Tax (CGT). This exemption extended as far as over the sale of UK commercial properties. Without a doubt this was the most attractive tax incentive for overseas investors to own UK commercial property. It allowed them to achieve a significantly higher return on their UK investments, especially in comparison to property holders of other major international property markets who are subject to local taxes on commercial property gains at rates between 10% and 34%.

The UK Government has tried to ‘level the playing field’ between UK resident and non-resident investors. The amalgam of changes brought in by the UK government in the past decade include:

  • With effect from 6 April 2019, the same rate of CGT as UK residents (currently 20%) is also applied on sales realised by overseas investors. This extension also applies to foreign investors with a ‘substantial interest’ (at least 25% or more) in a ‘property rich vehicle’ (entities that derive at least 75% of its value from UK land).
  • An annual tax charge for non-residential companies in possession of UK residential property (ATED).
  • Non-residents became subject to CGT on the sale from 6 April 2015 and onwards. The applicable rate of CGT being as high as 28%.
  • Inheritance tax for non-residents owning UK residential property via an offshore company or trust structure

With hindsight, it was only a matter of time before the Government decided to extend the CGT rules to commercial property holders.

Incentives Lost

The end of these generous tax breaks could potentially and unsurprisingly discourage overseas investors from placing funds in the UK commercial property market. One would think that the economy as a whole would have benefited significantly more from other means to increase tax revenues or changes which actually promote investment in the UK. Surely the UK’s post-Covid and Brexit landscape is crying out for further investment.

Worryingly, some studies paint a different picture. Since 2010, the number of foreign investors in UK properties has halved, according to a study in 2017 by Countrywide. It is highly likely that this decline could have been even worse had the sterling been stronger. Although the tax policy changes cannot be held solely responsible for this decline, it is believed that foreign investment in the residential market has been negatively affected by increased tax and administrative burdens. It would come as no surprise should a similar trend be observed with the commercial property market.

By contrast, countries such as Belgium, Portugal, Spain and Switzerland, overseas property investors receive residency and visa incentives. This is in strong comparison with the UK, where it seems that the Government is inclined to win political favour in laying down deterrents to foreign investment in place of incentives.

The Government’s decision to change the tax treatment of overseas investment in UK commercial property might prove to be quite short-sighted, with only increasing revenues in the short-term.

Following the example of other European countries by offering incentives to overseas investors, will most likely offer the UK more financial benefits in the coming years, not only within the property market but in the entire economy.

Tread Carefully

It has always been our advice that overseas investors seek expert guidance from experienced UK tax advisors before entering the UK commercial property market. This ensures that they fully understand their tax reporting and payment obligations to HMRC. Given how the UK tax net has been cast further, the risk of entanglement ought not be overlooked.

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Posted in Blog, Property & construction