Capital gains tax charges from 6 April 2015

A charge to corporation tax applies to disposals of residential property in the UK by non- UK resident companies from 6 April 2015. This mirrors the similar changes to capital gains tax (CGT) for non-corporates from that date.

The tax charge applies to gains realised on property used or suitable for use as a dwelling, including property being constructed or adapted for use as a dwelling. Disposals of trading stock continue to be subject to tax on profits, where the trade is operated through the UK, as previously.

Larger scale institutional investment companies will not be caught by these new provisions but a new 'narrowly controlled' test has been introduced so that smaller private investment vehicles will be subject to the charge. Essentially any non-resident company controlled by five or fewer individuals or companies (including connected parties and with aggregation of close family members' interests), which are themselves narrowly controlled (unless one of those individuals is a 'qualified institutional investor'), is within the scope of the charge.

Only gains arising after 5 April 2015 are subject to the new charge as a result of a 're- basing' of the property at its market value at that date. There is an option to time apportion the gain over the whole period of ownership so that only the post 6 April 2015 pro rata element of the gain is taxed (although not if the disposal is also subject to ATED- related CGT – see below), or, alternatively, the gain or loss can be computed over the whole ownership period.

The rate of tax applied to the gain is at the same rate as UK corporation tax (20%).

Under the rules, any non-resident company disposing of UK residential property must notify HM Revenue & Customs (HMRC) within thirty days of completion of the sale that the disposal has occurred.

If the company does not have an established relationship with HMRC (ie a live self- assessment record or within ATED for the previous period) the gain or loss must be reported, with any reliefs claimed, and the tax has to be paid within the same thirty day period.

Companies with an established relationship will also have to include the disposal in their self assessment return and pay the tax within the usual self assessment timescales.

Losses on disposal of UK residential property are ring-fenced for use against gains on such properties by the same non-UK resident company in the same tax year or carried forward to later years. Companies are able to benefit from a form of indexation allowance and, for companies in a group, a limited form of pooling where gains and losses on disposals of UK residential property can be offset by different members of the same group. Clear evidence of group membership will need to be supplied to HMRC. A 'de-pooling charge' will arise when companies leave the group, with there being a deemed disposal of UK residential property held by that company.

As noted below, where ATED-related CGT applies to any part of the gain, that part is not then subject to CGT. Where ATED-related CGT, or the new CGT charge outlined above, applies directly to any part of a gain, that part is not also attributed to shareholders under various existing anti-avoidance provisions.

Changes to annual tax on enveloped dwellings (ATED) thresholds

The ATED charge initially applied to UK residential properties held in corporate and similar structures if worth more than £2m in April 2012, or at acquisition if later.

The ATED charge has now been extended to such properties worth more than £1m from April 2015 and it will also apply to those worth more than £500,000 from April 2016. In both cases the valuation for ATED purposes is that at 1 April 2012, or at acquisition if later. The new charges have initially been set at £7,000 and £3,500 per annum for properties in these two bands. However the ATED return for properties first falling within the charge from 1 April 2015 is not required to be submitted until 1 October 2015, with any payment being due by 31 October 2015.

There are various reliefs from paying ATED, for example, where the UK residential property is let on a commercial basis to third parties. Such relief has to be claimed on an annual basis, but there is now a single annual return for all properties subject to the same relief with there being no requirement to file returns for any changes in such properties during the year.

ATED charges for properties worth more than £2m have increased significantly from 1 April 2015 with charges ranging from £23,350 to £218,200 for those over £20m. Some companies may wish to give further consideration to 'de-enveloping' the properties as a result of these increases.

Interaction of ATED-related CGT charge and the new non-resident CGT charge

Where ATED is payable then there is also an ATED- related CGT charge when the property is sold. Where the property is subject to both the new CGT charge detailed above and the ATED-related CGT charge, the ATED-related CGT charge (28%) will take precedence. This will mean that changes in use of properties, over their period of ownership, will need to be considered so that gains/loss can be allocated correctly between the two regimes.

We have taken care to ensure the accuracy of this publication, which is based on material in the public domain at the time of issue. However, the publication is written in general terms for information purposes only and in no way constitutes specific advice. You are strongly recommended to seek specific advice before taking any action in relation to the matters referred to in this publication. No responsibility can be taken for any errors contained in the publication or for any loss arising from action taken or refrained from on the basis of this publication or its contents. © Smith & Williamson Holdings Limited 2015