Will tax charge for non-residents selling UK Commercial Property affect overseas investment?

In recent years, solid and steady capital growth and reliable rental yields, as well as favourable exchange rates and regulation have made the UK commercial property market a lucrative option for overseas investors. Their entitlement to generous tax breaks is unlikely to have dampened enthusiasm, either.  

Historic exemption from UK Capital Gains Tax (CGT)

The most attractive tax incentive for overseas investors has undoubtedly been a complete exemption from UK CGT on profits generated from the sale of a UK commercial property. With property holders in most major international property markets subject to local taxes at the rate of 10 – 34 per cent on commercial property gains, overseas investors in the UK stood to gain a significantly higher return on their investments.

What’s changed? 

The 2017 Autumn Budget changed all this. For sales of commercial property after 6 April 2019, non-resident investors would now pay the same rate of CGT (currently 20 per cent) as their UK counterparts.  

Why the change? 

The Government’s stated objective was to “level the playing field” between UK resident and non-resident investors. However, without careful implementation, this move could backfire, and it is essential that steps are taken to avoid discouraging overseas investment or drive down property prices.   

Approach to overseas investors 

This tax change is one of several policies introduced over the last 5 years impacting overseas investors and worsening their UK tax position. Up until now these changes have only impacted residential property but commercial property is now brought into the mix for CGT. 

A further change came in April 2020 for non-resident landlords which will now be brought within the UK corporation tax regime rather than income tax as historically has been the case. Whether this is a good or bad thing will depend on the individual position. 

The only remaining exemption from UK tax for non-residents at today’s date is there is still no UK inheritance tax on commercial property held via an offshore company or trust structure – however we suggest you watch this space!  

Summary of recent changes:

  • 6 April 2013 – The Annual Tax on Enveloped Dwellings (ATED) rules can result in a charge for non-resident companies owning UK residential property or at least the need to make a return to HMRC. 
  • 6 April 2015 – Disposals of residential property by non-residents have been subject to CGT. 
  • 6 April 2017 – Introduction of inheritance tax for non-residents owning UK residential property via an offshore company or trust structure. 
  • 6 April 2019 – Introduction of capital gains tax for non-residents on the disposal of commercial property. 
  • 6 April 2020 – Non-resident landlords will be subject to corporation tax on their profits not income tax. 

Seeking expert guidance from experienced UK tax advisors now can help overseas investors to keep up to date with their new-found obligations to pay tax to HMRC, and avoid experiencing any potential headaches further down the line.

Posted in Blog, Property & construction