There are a number of changes that overseas investors need to know about if they hold UK property.
The first relates to the introduction of capital gains tax ("CGT"). Unlike many jurisdictions, foreign owners have not had to pay tax on UK property gains. This is set to change from April next year. From April CGT will apply to gains on both direct and some indirect disposals. Indirect disposals that are caught, are those made by "property rich" vehicles i.e. where 75% of the vehicles value derives from UK property.
There are areas of uncertainty in the draft legislation, notably what happens to exempt or off-shore investors. The current proposal is that certain funds / joint ventures can elect to be treated as transparent or exempt for CGT purposes to enable investments to be tax neutral. This is likely to carry compliance burden.
The draft legislation proposes that Investors can opt to "rebase" the cost of their property to market value at April 2019 (to protect historic gains). Therefore, if a disposal is anticipated after April 2019 a valuation should be considered to determine the impact of rebasing.
A further change is the proposed introduction of a public overseas owners register. This will require overseas entities (other than governments and public authorities) to provide information on their beneficial ownership before they are able to purchase and then hold UK real estate. A government consultation on the proposed legislation has recently closed and it is anticipated that a Bill will be introduced next year with the register going live in 2021.
The requirement to register ownership will apply to freehold land and leases (that run for more than seven years) known as a "qualifying estate". The entity needs to take "reasonable steps" to identify and send information on beneficial ownership to the register which will be maintained at Companies House.
If the overseas entity holds a qualifying estate when the Bill becomes law they will have 18 months to register it at Companies House or dispose of it. There are criminal sanctions for failure to comply and by virtue of a restriction that will be lodged at the Land Registry the overseas entity will not be able to lease, sell or charge that qualifying estate unless registered. The information on the register will also then need to be updated annually.
Historically, one benefit of holding UK real estate through an overseas entity was the ability to keep the ultimate ownership details anonymous. This allowed individuals with privacy concerns to avoid a public record of their wealth. The new regime means this will no longer be possible as the aim of it is to increase transparency so as to deter money laundering.
This new regime along with the introduction of CGT may mean that overseas entities holding UK property may wish to review their structures. It maybe advisable to undertake valuations, de-envelope certain property and/ or identify and record beneficial ownership.
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.
