The Autumn 2017 Budget speech may have caused you to ponder whether Westminster had turned into Wonderland. The Chancellor promised cash giveaways for the NHS, housebuilding and just about everyone in between, with no tax rises or any increase in the borrowing requirement. However, at the end there was a consensus that there was nothing earth-shattering from a tax perspective.
It was therefore a surprise to review the Budget documents and find a consultation document on extending the scope of capital gains tax (CGT) on non-residents owning UK property.
These changes will not affect the average UK voter, which is possibly why they weren’t mentioned in Mr Hammond’s speech. But for non-residents and their advisers and for the property market generally, the changes will have important ramifications. If you’re an adviser, you should be aware that in some cases there will be a reporting requirement on you.
We explain the proposals below. At this stage these are subject to consultation: it is unlikely that the government will retract the measure, but some of the detail could change.
Proposals for disposals
There are two limbs to the proposals.
- CGT will be extended to non-UK residents who dispose of UK commercial property. The charge already applies to residential property.
- CGT will be extended to cover “indirect disposals”, which is where a non-resident sells an entity which owns UK property rather than selling the property itself.
The new rules will apply from 1 April 2019 for companies and 6 April 2019 for everyone else. As a taxpayer calculating the taxable gains, you can use the April 2019 value of the property as the base cost.
For direct disposals you can also use the original cost of the property where this produces a lower gain (or higher loss). But for disposals of commercial property, it is proposed that the time apportionment basis which is available for residential property will not be allowed.
For indirect disposals, it is proposed that only the April 2019 value method can be used. This will operate harshly where you have a gain based on that value but an overall loss based on the original cost.
End of exemption
The exemption for widely held companies from the existing charge on disposals of residential property will be removed, so that all non-residents will be within the scope of the charge. The existing regime also includes exemptions for student accommodation and other communal residential property. This isn’t specifically mentioned, but it seems reasonable to assume that these exemptions will be removed.
Property funds
It is also proposed that property funds will be within the scope of the charge on disposals of property they hold, unless the fund is exempt from UK tax. Similarly, investors in these funds will also be subject to tax when they sell their interest in the fund, if the fund meets the conditions for indirect disposals. However, foreign pension funds will be exempt in the same way as their UK counterparts.
Conditions for indirect proposals
For indirect disposals, two conditions will have to be met to be within the charge:
- At the time of disposal (of the entity), 75% or more of its value derives from UK land (non-UK land is not counted).
- The non-resident holds or held an interest of more than 25% in the entity at some point in the last five years.
For the property test, this looks at the gross value of the company’s assets, ignoring any liabilities. Where a group of companies or entities is disposed of, the 75% property test is looked at on a group basis. There will be rules that allow tracing through subsidiary companies to determine how much of any company’s value derives from UK property.
For the 25% holding test, ‘entity’ means a company, partnership or trust. In deciding how much of an entity you hold, your interest is aggregated with interests held by connected persons. The five-year period will include periods before April 2019.
The new rules will include a targeted anti-avoidance provision to prevent abuse. There will also be special rules to prevent arrangements being entered into before April 2019, designed to get round the new rules.
Double tax treaties
The consultation document also comments on the possible application of double tax treaties. The majority of the UK’s tax treaties will allow the UK to impose the new CGT charge as intended. However, a small number may prevent its application entirely while others might limit its application to certain indirect disposals.
As far as possible, existing capital gains rules will apply when computing gains and losses under the new charge. The government has already proposed bringing non-resident companies into the corporation tax regime (currently they are within income tax) and this will apply also to capital gains.
The reporting regime will also be the same as the existing non-resident CGT regime for residential property – transactions must be reported within 30 days to HMRC and then through the self-assessment system if the taxpayer is in self-assessment.
For indirect disposals, if you’re an adviser involved in the transaction, you will be required to report the transaction within 60 days to HMRC if they have reason to believe it may not otherwise have been reported. There is no definition of ‘adviser’ in the document so it is not clear how far this will extend.
ATED: an altered approach
One welcome point is that as part of this measure, the government proposes to abandon the CGT rules related to the annual tax on enveloped dwellings (ATED). This means that there would be a single calculation under the new non-Resident CGT rules. It appears for existing properties, the ATED gains rules will still apply to periods before April 2019.
Overall, we’re looking at a fundamental reform to the UK CGT system. The change was widely expected, but its timing is sooner than anticipated. It’s important to remember, though, that the proposals are consultation-only at this stage and there could be changes in the detail.
For more information, please get in touch with your usual BKL contact or use our enquiry form.