UK: The Private Client Perspective From Tax Journal 2018

Last Updated: 27 July 2018
Article by Andrew Goldstone and Natalie Quail

Non-resident's CGT to include gains on commercial property disposals

This measure was announced at Autumn Budget 2017 and a consultation ran from 22 November 2017 to 16 February 2018.

Finance Bill 2019 will include legislation to bring gains accruing to non-UK residents on disposals of all UK real property within the scope of UK CGT. The material effect of this measure (effective from 6 April 2019) will be that non-residents' CGT will be extended to disposals of commercial property. Non-residents who sell shares in a company that derives its value from UK property will also have to pay CGT.

The government has stated that TCGA 1992 Part 1 and Part 2 Chapters 5, 6, and 7 will be re-written to accommodate the taxation of non-UK residents making disposals of interest in UK land, and to simplify the alignment of the new and existing rules. The government has emphasised that apart from the changes needed to implement this measure, the draft is merely a re-statement of the existing law and does not change the way the existing provisions work.

In summary, the draft legislation imposes a charge to CGT on non-UK residents who incur gains on:

  • direct disposals of interests in all UK property (TCGA 1992 new s 1A(3)(b)); or
  • disposals of interests in entities that derive at least 75% of their value from UK property (described as 'property-rich entities'), where the person has (or had at any time in the previous two years) a substantial direct or indirect interest in the entity (broadly, at least 25%, which also includes the holding of certain close family members). There will be an exemption for investors in such entities who hold a less than 25% interest (TCGA 1992 new s 1A(3)(c)).

All non-UK resident companies, including close companies, will be charged to corporation tax rather than CGT on their gains.

The government aims for this measure to 'level the playing field' between UK residents and non-UK residents on disposals of UK immovable property. It also extends the charge on gains on disposals of interests in residential property to diversely held companies, those widely held funds not previously included, and to life assurance companies.

This new extension will bring almost all non-resident owners of UK property within the scope of UK capital gains tax and will result in the removal of one of the most attractive features of UK real estate for non-UK investors. Fortunately, some of the harsher proposals included in the original consultation have now been relaxed. Also rebasing will be permitted so that only gains after 6 April 2019 will be exposed to the new rules.

Reduction of CGT payment window for disposals of residential property

This measure was announced at Autumn Statement 2015 whilst Budget 2017 announced the deferral of its introduction until April 2020.

A technical consultation was conducted between 11 April 2018 and 6 June 2018 on a proposal for making payments on account of CGT on gains arising from residential property sales and disposals. It proposed that from April 2020, payments are to be made within 30 days of the sale or disposal being completed. It has now been confirmed that this measure will be introduced from April 2020. A payment on account of CGT will need to be made when a residential property is sold or otherwise disposed of, such as by way of outright gift. Payment will be due within 30 days of the completion of the disposal.

The current law for declaring and making payments of CGT is contained in TMA 1970. Sections 7–9C contain the main provisions for the making of self-assessment returns of income and gains. Section 59B sets out when any CGT due for a year of assessment is payable. In most cases, it is 31 January following the end of the tax year of disposal.

For non-residents, ss 12ZA to 12ZN set out when a return reporting a disposal of a UK residential property must be made to HMRC (whether or not a gain is realised). Section 59AA makes provision on an associated requirement to make a payment on account of CGT liabilities. Where required, the return and payment is due within 30 days of the disposal being completed.

The government has stated that legislation will be introduced in Finance Bill 2018/19 to replace TMA 1970 ss 12ZA–12ZN and s 59AA with a new schedule that will form part of the subsequent Finance Act. The schedule, which will apply to both residents and non-residents, sets out the circumstances in which a return of a residential property disposal is required to be delivered to HMRC. It also sets out how to calculate the amount payable on account of the person's liability to CGT for the tax year in which the disposal takes place.

The general rule will be that a return in respect of the disposal must be delivered to HMRC within a 'payment window' of 30 days following completion of the disposal, and a payment on account made at the same time. It is anticipated that the self-assessed calculation of the amount payable on account takes into consideration unused losses and the person's annual exempt amount. The rate of tax for individuals is determined after making a reasonable estimate of the amount of taxable income for the year.

The policy reason behind this change is that the government thinks it is right that tax is paid sooner in respect of gains from residential property to reduce error and increase compliance. However, the practicability of these measures for many property owners remains questionable.

Capital gains that arise when a second home or a rental property is sold or otherwise disposed of can be significant. The conclusion of the consultation highlights that respondents were mainly concerned about the practicability of making accurate calculations within the proposed 30 day window and the treatment of allowable losses.

It should be noted that the changes will affect both residents and non-residents disposing of a second home or rental property. They will not apply where the gains are not chargeable to CGT; for example, where the gains are covered by private residence relief, or arise from the disposal of a foreign residential property in a country covered by a CGT double taxation agreement, or arise to a person taxed on the remittance basis.

Extension to time limits for assessing unpaid offshore tax

The government announced at Autumn Budget 2017 that the assessment time limit for non-deliberate offshore tax non-compliance will be increased from the current four years (or six years if careless) to at least 12 years. HMRC issued a public consultation on the details of this reform on 19 February 2018. This consultation closed on 14 May 2018. The response to the consultation and the draft legislation were published on 6 July 2018.

This measure increases the tax assessment time limit for non-deliberate offshore non-compliance to 12 years for income tax, CGT and IHT unless:

  • HMRC has received information under automatic exchange of information agreements from foreign tax authorities and could reasonably be expected to raise an assessment within the existing time limits;
  • a longer time limit applies under TMA 1970 s 36(1A) and any other Taxes Acts provisions; or
  • the assessment results from a transfer pricing adjustment.

Where the taxpayer has sought deliberately to evade tax, the time limit will remain unchanged at 20 years. The existing time limits are set out in TMA 1970 Part IV for income tax and CGT, and in IHTA 1984 Part VIII for IHT. The key amendments will be included in Finance Bill 2019 as follows:

  • Clause 33 of the draft Finance Bill 2019 inserts new s 36A in TMA 1970. For income tax and CGT purposes, an 'offshore matter' is defined as involving income or gains arising from a source or assets outside the UK and activities carried on outside the UK. An 'offshore transfer' refers to income or gains received in or transferred to a territory outside the UK (from a UK source) not involving an offshore matter.
  • Clause 34 inserts s 240B in IHTA 1984 to increase from four to 12 years the time limit for assessing lost IHT on an offshore matter or transfer.

These amendments will have effect in relation to income tax and CGT assessments from 2013/14 in cases where the loss of tax is brought about carelessly; and from 2015/16, and subsequent years, for other cases (where not already subject to the 20 year time limit). They will apply for IHT to chargeable transfers taking place on or after 1 April 2013 where the loss of tax is brought about carelessly, and 1 April 2015 for other cases not subject to a longer time limit. The amendments will take effect when Finance Bill 2019 receives royal assent.

There have been significant concerns that taxpayers who have made innocent mistakes could become the subject of extended investigations by HMRC as a result of the change in the rules. In particular, the extension of the current time limits to 12 years will restrict tax certainty for individuals, trustees or others liable to income tax, CGT or IHT.

However, importantly, the government has taken account of the majority of responses concerning the application of the legislation to corporation tax and the impact of the common reporting standard. As such, the extension of time limits will cover IHT, IT and CGT but not corporation tax or where HMRC could reasonably be expected to raise an assessment within the existing time limits based on information received automatically.

Deferral of payment of exit charges for CGT

The government has published draft legislation governing when CGT payments must be made to HMRC in respect of exit charges, which can arise on unrealised gains when:

  • a trust ceases to be resident in the UK; or
  • assets cease to be used in a trade carried on through a branch or agency in the UK.

This is a welcome change for trustees and certain non-residents as it allows for payment of these exit charges to be deferred in certain circumstances.

The current law is contained in TCGA 1992 ss 25 and 80. Under TMA 1970, the charge is payable by the 31 January following the tax year in which the charge arose.

Under the proposed revisions, the existing exit charge rules will be retained. However, legislation will be introduced in Finance Bill 2019 offering certain trusts or non-UK resident individuals the option of deferring the charge and paying it over six years in equal instalments. The deferral option will only be available where the trust or assets move to a EU or EEA country. The amounts deferred will be subject to interest pursuant to a new Sch 3ZAA to TMA 1970.

Interestingly, the driver to this change is founded in a preliminary ruling by the CJEU in 2017 (Trustees of the P Panayi Accumulation and Maintenance Settlements v HMRC (Case C-646/15) on the application of exit charges that arise where a UK resident trust ceases to be resident in the UK and moves its place of residence to another EU or EEA member state. It was held that the immediate capital gains tax charge on trustees was discriminatory according to EU principles. In its decision, the CJEU found that whilst exit charges are compatible in principle with rules on the right of freedom of establishment, in the case of those trusts with economically significant activities, the UK should have offered them a choice between immediate payment and deferral of the tax that may become due.

The term 'economically significant activity' has the same meaning as in TCGA 1992 s 13A(4). It appears to derive from the requirement for a trust to be 'profit-making' in order to benefit from the freedom of establishment in EU law. This was a condition that was met in Panayi because the trust was carrying on an economic activity given that the trust assets were intended to generate profits for the beneficiaries to enjoy. The proposed new legislation will similarly stipulate a requirement that the trust is engaged in 'economically significant activity'.

This measure will have effect for CGT from 6 April 2019.

It is interesting that the government will legislate in accordance with the EU decision notwithstanding the proposed withdrawal of the UK from the EU in 2019.

What to look out for?

The consultation on the simplification of the taxation of trusts has not yet been published. There is no indication of a timeline, but an update is expected over the next few weeks.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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