Non-residents’ gains on UK real estate: impact of new tax rules
Changes made by the Finance Act 2019 will now affect UK real estate held both directly and indirectly by non-residents, vastly increasing the scope for error and omission, argues Ray Magill, member of the LSAC Tax Committee.
The advantages of holding UK real estate within a corporate envelope have been gradually whittled away:
- in 2013 the annual tax on enveloped dwellings (ATED) applied to companies owning ‘expensive’ dwellings (and a then penal rate of SDLT on companies buying UK residential property);
- in 2015 CGT on disposals of UK residential property by non-resident individuals, trustees and close companies arrived;
- in 2017 inheritance tax was extended to shares in offshore companies whose value is attributable to UK residential property and associated loans, and;
- the changes made by Finance Act 2019 make the corporate ‘envelope’ even less attractive. Now, from 6 April 2019, non-residents may be subject to tax on gains on disposal of both UK real estate and interests in entities holding UK real estate.
The scope for error and omission is vastly increased. Re-basing at 5 April 2019 (5 April 2015 for disposals of residential property by individuals, trustees and close companies) will restrict the tax liability, but non-resident individuals and trustees have to report disposals within 30 days of completion even if there is no tax to pay.
Companies and collective investment vehicles (CIVs) only have to report disposals if there is a tax liability, but within three months of unconditional exchange of contracts.
The interests caught are, for example, shares in a company, if at least 75% of the value of its assets is represented by interests in UK land (disregarding land that is used in its trade) after deducting liabilities relating to assets other than UK land.
Except in the case of interests in UK property-rich CIVs, a disposal of an interest is only affected if the person making the disposal (together with those ‘connected’ with that person) has at least a 25% interest, or held such an interest within the preceding two years. There is no de minimis in the case of interests in UK property-rich CIVs.
Individuals and trustees are subject to capital gains tax (CGT), companies to corporation tax (CT).
CGT is payable within 30 days of completing the disposal, unless - but this only applies to disposals in 2019/20 – self assessment returns are filed, in which case the tax will be payable by 31 January 2021.
For many companies, the CT on gains on disposals in 2019/20 (and in later years if the company has no income) would strictly be due almost immediately, because of the company having a one-day accounting period (AP) and qualifying as a ‘large’ or ‘very large company’. However, in such circumstances, HMRC proposes by concession that tax should be paid within three months and 14 days after the disposal. That is, when contracts are exchanged unconditionally, not the time of completion.
HMRC says that a CIV or a company that has or expects to have four or more disposals in a financial year will have a 12 month AP, therefore with CT payable nine months and a day after the AP (unless being sufficient to require earlier instalments). Otherwise, for 2019/20 CT is payable nine months and a day after exchange (unless, again, being sufficient to require earlier instalments).
For later years, if the company has taxable income, when non-resident companies’ rental income becomes subject to corporation tax instead of income tax, CT is payable nine months and a day after the company’s AP (unless, again, being sufficient to require earlier instalments).
An obvious target is the non-resident individual who ‘owns’ a UK home through an offshore company. However, the new regime is capricious in its effect. When considering the disposal of shares, it only looks at the nature of the company’s assets at the time of disposal and the gain on the shares since 5 April 2019 or subsequent acquisition. This is regardless of the reason for any gain in the value of the shares.
For example, a company might have made a big gain on the sale of overseas real estate and have only invested in UK land on the eve of a sale of the company’s shares. A gain on the shares would be taxable simply because the company was now UK property-rich.
Ray Magill is a member of the LSCA Tax Committee
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