The 2017 Autumn Budget included some changes to the way property in the UK will be subject to UK taxation when this is held offshore in some way. This extends other recent changes which largely affected residential property.
Current tax position
Simplistically the current situation for property held by a non-resident investor is:
- Residential property – subject to CGT at the rates for individuals
- Commercial property – exempt from CGT entirely.
Changes announced in budget
The changes announced in the budget related to:
- UK tax treatment of commercial property held directly by non-residents
- UK tax treatment of disposal of shares where high proportion of value attributable to UK land and property
- Tax treatment of ‘widely-held’ non UK companies
- The non-resident landlord regime.
Changes to taxation of UK commercial property – April 2019
Gains made on the disposal of UK commercial property by non-residents will in future be taxable in the UK. The changes are scheduled to come into effect from 1 April 2019, but in a similar way to when the rules were amended for residential properties the taxable gain will only be the gain arising after 1 April 2019, i.e. there will be a rebasing of the value for CGT purposes at 1 April 2019.
Changes to the taxation of disposal of shares
In addition, capital gains tax will be charged for the disposal of interests, be it direct or indirect, in entities where 75% or more of its gross asset value derives from UK land and property. This will only apply if the non-resident investor held at least a 25% interest the entity at any point during the 5 years before disposal.
Tax treatment of widely-held non-UK companies
Widely-held non-UK companies will also be subject to non-residential capital gains tax on all disposals of UK property, again both residential and commercial. How this will apply is not yet clear and there is to be further consultation on the impact of these changes, in particular, in regard to their effect on the funds industry and disposal of interests in fund.
Individuals (and trustees), will be taxed at 28% on the gains from the disposal of residential property, and 20% on the gains from non-residential property.
Companies will be taxed at a rate equivalent to the corporation tax rate. This means companies will pay 19% up to April 2020, when the rate will fall to 17%.
Some exemptions to the charge will apply for pension funds and sovereign wealth funds, among others.
Non-UK investors in certain jurisdictions will also not be subject to the changes, but this will depend on the terms of the relevant double tax treaty, and this will need to be checked carefully.
As usual, anti-forestalling rules will apply from 22 November 2017 (Budget day) to deal with things like tax treaty abuse, and targeted anti-avoidances rules will be put into effect.
Changes to non-resident landlord scheme – April 2020
Currently, under the non-resident landlord scheme, companies pay income tax on their net income. This is changing and from April 2020 Non-Resident landlord companies will be subject to corporation tax and not income tax. By this date, corporation tax is expected to be 17% compared to the 20% income tax rate currently applied so tax liabilities may reduce for companies.
However, the new corporate interest restrictions which apply to all UK companies from 1 April 2017 will also apply to non-resident corporate landlords so there may be a reduction in interest deductibility. What impact this has will depend on the debt level of the company.