UK: Non UK Resident Companies Owning UK Residential Property

Planned capital gains tax charges from 6 April 2015

The Government has announced plans to extend the charge to corporation tax 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.

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

Larger scale institutional investment companies should not be caught by the new provisions but a new 'narrowly controlled' test will be introduced so that smaller private investment vehicles may be subject to the charge. Essentially a 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'), will be within the scope of the charge.

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

The rate of tax applied to the gain will be at the same rate as UK corporation tax (20% from April 2015).

Further rules are expected to require any non-resident company disposing of UK residential property to notify HMRC, within thirty days of completion of the sale, that the disposal has occurred and to report the gain or loss and any reliefs claimed.

If the company does not have an established relationship with HM Revenue & Customs (HMRC) (ie a live self assessment record; the delivery of an ATED–related CGT return does not qualify as a live record) the tax will have to be paid within thirty days from completion.

Companies with a live self assessment record 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 will be 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 will be 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, the same gain will not then be subject to CGT. Where ATED-related CGT, or 'normal' CGT applies directly to a gain, that gain will not also be attributed to shareholders under various existing anti-avoidance provisions.

Changes to annual tax on enveloped dwellings (ATED) thresholds

The ATED charge currently applies 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 will be extended to such properties worth more than £1m from April 2015 and then 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 will initially be set at £7,000 and £3,500 per annum for properties in these two bands. However the ATED return and payment for properties first falling within the charge from 1 April 2015 will not be required to be submitted until 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. Under the current rules such a relief has to be claimed on an annual basis. Following consultation with interested parties, some simplification has been announced in that there will now only be 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 will increase significantly from 1 April 2015 with charges ranging from £23,350 to £218,200. 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 the new CGT charge detailed above and also 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, may need to be considered so that gains/loss can be allocated 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.