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

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Factors such as a constant and stable capital growth, reliable rental income, positive exchange rates and regulation have made the UK commercial property market very attractive during the past few years. Additionally, generous tax breaks make this option even more lucrative for overseas investors.

Levelling the playing field

Overseas investors being completely exempt from UK Capital Gains Tax (CGT) when selling their UK commercial properties, has without a doubt been the most attractive tax incentive. This allows them to achieve a significantly higher return on their UK investments, than property holders who are subject to local taxes on commercial property gains in other major international property markets at rates between 10% and 34%.

Recently, the Government tried to ‘level the playing field’ between UK resident and non-resident investors, when in the 2017 Autumn Budget, Philip Hammond introduced the same rate of CGT (currently 20%) as UK residents, on sales realised by overseas investors after 6 April 2019. However, this move should be carefully implemented to avoid a sudden drop in property prices and to ensure overseas investment is not discouraged.

Overseas investors’ tax position

In the past five years, many other tax policy changes and proposals were introduced, which also worsened the UK tax position for overseas investors, but until now only affected the UK residential property market. Included are; an annual tax charge for non-residential companies in possession of UK residential property (ATED), CGT for non-residents selling residential property after 6 April 2015 and inheritance tax for non-residents owning UK residential property via an offshore company or trust structure.

Obviously, it was only a matter of time before the Government decided to extend the CGT rules to commercial property holders. Although, with the current uncertainty around Brexit and the rising nationalism within political conversations, it would be smart to analyse the potential consequences following this measure.

Tread carefully

The end of these generous tax breaks could potentially harm the UK commercial market by discouraging overseas investment. The economy as a whole would benefit significantly more from other means to increase tax revenues or changes which actually promote investment in the UK.

Since 2010, the number of foreign investors in UK properties has halved, according to a study in 2017 by Countrywide, and it is highly likely that this decline could have been even worse, would Sterling have 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. Therefore, with the UK residential market in mind, the commercial property market could possibly soon be following the same trend.

Incentives

In 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, in this Brexit landscape, foreign investment is not welcome, eventually driving away foreign commercial property owners who prefer countries who offer them incentives, rather than deterrents.

In order to avoid potential future problems, overseas investors are advised to seek expert guidance from experienced UK tax advisors, ensuring full understanding of their new-found obligations to pay tax to HMRC.

However, given the ongoing Brexit uncertainty, 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.

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Posted in Blog, Property & construction