UK: Major Tax Change Ahead For Non UK Resident Investors In UK Property

Last Updated: 27 September 2018
Article by Martin Griffiths and Helen Coward

The change is currently proposed to apply to gains accrued on or after April 2019. The intention is to align the UK with other countries and remove an advantage which non-residents have over UK residents by bringing all gains on non-resident disposals of UK property within the scope of UK tax.

Current Position

Capital gains tax (CGT) and corporation tax were historically only charged on disposals by UK residents but expanded in 2015 to also include disposals of UK residential property by non-UK residents. A consultation, announced during the 2017 Budget and ending earlier this year, proposed extending the regime to disposals of any UK property by non-residents. The purported aim of such proposals was to both simplify the existing rules, whilst also making a more "level playing field" between investments in UK land by UK residents and non-UK residents.

The responses to the consultation and draft legislation were published on 6 July 2018 and it is anticipated that any changes will take effect from April 2019.

Proposed new CGT charges

There are two new charges:

Disposal of UK commercial property by non-UK residents

CGT for non-UK residents currently only applies to disposals of UK residential property held by non-widely held companies. CGT will be extended to apply to disposals of any UK property, i.e. including of non-residential property and of residential property by widely held non-UK resident companies.

Disposal of shares in "property rich" companies

CGT will also be imposed on the sale of shares of companies whose assets consist of, to a substantial extent, UK real estate (either residential or non-residential). Despite the introduction of non-resident CGT to disposals of UK residential property in 2015, the disposal of shares in property holding companies remained a "safe haven". This will no longer be the case from April 2019, when the new rules will apply if:

  • the company is "property rich" (i.e. if 75% or more of its value derives from UK property). The disposal could be of the company which directly owns the UK property, or a parent or holding company of a subsidiary holding UK property. Where more than one company is sold, complicated rules apply to work out whether, in aggregate, 75% of the value of the companies derives from UK property; and
  • the non-resident (and related partners) hold, or at some point in the previous two years have held, at least a 25% interest in the equity.

Responses to the consultation expressing concern about the "cliff-edge" nature of the 75% property richness test, and the risk of an entity straying in and out of the 75% criterion have been downplayed by the government, who state that the 75% test mirrors the provisions in international treaties.

The government also agreed to reduce the time period looked at in respect of the 25% interest criterion from five years, down to two years, which should lessen the administrative burden of the new rules.

Summary Table

Type of sale by non-resident Current position Position post April 2019
Sales of UK residential property Gains arising after April 2015 subject to CGT for closely held companies. Charge extended to widely held companies.
Sales of UK non-residential property Not currently taxed. Gains arising after April 2019 will be subject to CGT.
Sales of shares in property holding companies Not currently taxed. Gains arising after April 2019 will be subject to CGT if company is "property rich" and interest exceeds 25%.

Re-basing opportunity

As was the case with the introduction of non-resident CGT for residential property, the acquisition cost of assets affected by the changes (both the direct and indirect charges) will be re-based to the value on the date on which the changes come into force. Alongside this provision the new rules provide that:

  • a taxpayer can elect not to re-base, which might be helpful where, for example, property goes down in value;
  • if the impact of the election is to create a loss, that loss will not become an allowable loss; and
  • non-UK resident companies which subsequently become UK resident may still re-base. The same will not apply the other way around, as this is seen as a measure to ensure that "on-shoring" is not de-incentivised.

Anti-forestalling measures are introduced from 22 November 2017 (when the proposals were first announced) and a targeted anti-avoidance rule aims to prevent any perceived structuring around the new rules.


The most eye-catching exception is that the charge on disposals of property rich companies will not apply to disposals of companies which derive their value from UK land used for trading purposes, other than to an insignificant extent. This measure was introduced in response to concerns about the possible application of the rules to businesses such as hotel chains and utility companies. However HMRC declined to specifically extend this exception to companies involved in the infrastructure sector.

Acknowledging that certain double tax treaties, such as the UK-Luxembourg treaty, may prevent the primary UK taxation of property gains from property rich vehicles, the government declined to comment further other than to state that it intends to renegotiate and amend double tax treaties, specifically citing Luxembourg. Therefore at present existing structures involving such jurisdictions may offer some protection, though the government response notes that anti-forestalling measures are intended to preclude treaty shopping.

Impact on the funds industry

There is widespread concern about the impact of the changes on the funds industry, which is a major contributor to the UK real estate market. The government acknowledges that collective investment vehicles give rise to particular concerns and complexities and, as a result, has permitted an extension of the consultation to consider matters specific to the funds industry. We will be publishing a further note on the proposals announced in the consultation, which include:

  • removing the exception for widely held collective investment entities from the non-resident CGT charge for UK residential property;
  • removing the 25% minimum equity holding requirement from the test applicable to investors in funds;
  • the ability for certain funds to elect for tax transparent status; and
  • a special exempt status for certain classes of reporting fund.

Despite the ongoing consultation, it is anticipated that these measures will also be implemented in April 2019 together with the other measures discussed in this note.

Is this the end of offshore planning for investment in UK property?

In short, no. There are still certain opportunities available, such as:

  • the use of offshore holding companies for UK non-residential property, which may still offer certain inheritance tax advantages;
  • the use of an offshore structure which may improve the prospects of interest charged on debt finance being regarded as falling outside the UK withholding tax net.

Further, whilst the new rules on indirect disposals may lessen the attraction of selling shares in a company, as opposed to the property asset in question, there may still be SDLT advantages to selling those shares.

Further issues

Simultaneously with the introduction of the new CGT charges, the government is proposing to harmonise corporation tax, CGT and income tax in this area. The broad consequences of this are that:

  • Non-resident companies selling UK property will be subject to corporation tax (currently taxed at 19%) and not CGT.
  • Non-resident landlord companies will be subject to corporation tax and not income tax on their rental income.

In time this will require non-resident companies to register for corporation tax in the UK.

The draft legislation also included the removal of the CGT charge to properties which are subject to the annual tax on enveloped dwellings (where properties are held by "non-natural persons" other than for the purposes of a property rental, a property trading or a property development business). In practice this merely removes a charge that is now largely redundant.

Next Steps

A technical consultation will follow, based on the draft legislation and the proposals that have been outlined. The policy will be finalised in the Finance Bill 2018-2019 and the changes will comes into force in April 2019.

At Charles Russell Speechlys we can explain how the changes may impact on your investments and business and discuss what steps might be taken now in advance of April 2019.

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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