The UK Parliament continues to be active in tightening up (complicating?) the UK tax code. Two recent announcements affecting non-resident owners have particularly caught the eye, not least because they will also affect non-residential property, unlike most of the recent anti-avoidance rules which have mainly focused on residential property.
The first change that HMRC is consulting on is the introduction of capital gains made on the sale of non-residential property by offshore landlords within the scope of UK tax from 2019 (of course, capital gains made on the disposal of residential property have been within the capital gains tax net since 2013 or 2015, depending on the specific use and certain conditions being met). The result of this would be one unified capital gains tax rule for both residential and non-residential property – which sounds simple, but in practice would require careful unpicking of the existing rules.
Although the current status of the decision is not confirmed, it seems likely that the changes will almost certainly come into play, and whilst the CGT exemption for non-residents holding commercial property has often been described by this author as 'under siege', it was still a shock when this announcement was made. The big concession – driven by a need to avoid retrospective taxation – is that gains up to 2019 will not be subject to tax, so it will be some years before the real impact of the rule change is felt. However, it is genuinely likely to bring more investors onshore. For example, it will be much less efficient for tax exempt investors / investors who pay lower marginal rates of tax (e.g. pension funds and life assurance companies) to invest through offshore unit trusts, if those entities are caught by the new rules (which as things stand, they could be).
The second major announcement is that HMRC is looking to bring offshore landlords that hold both residential and non-residential property within the scope of corporation tax on rental profits from 2020 (currently, they pay income tax on rental profits). On the face of it, this is not bad news, given that the corporation tax rate is currently anticipated to drop to 17% (note that income tax is 20%).
However, the question is 17% of what? Especially as the computation of property rental profits is more restrictive for corporation tax purposes than income tax purposes. The main driver for HMRC appears to be the exposition of offshore landlords to the corporate interest restriction rules, which essentially stop or restrict interest deductions on debt from connected lenders (and even third party lenders) in certain circumstances. Ultimately, offshore landlords are likely to have higher taxable profits once these rules come into force, although we still have little detail on the precise form of the legislation.
Offshore landlords would therefore be right to feel a little bruised by the continual bombardment of 'anti-avoidance' rules in the UK, as HMRC seeks to make everyone pay the 'right' amount of tax. However, the non-tax attractions of the UK as a place to invest remain as strong as ever - it is simply a case of navigating one's way through the new rules and ensuring anticipated profits are modelled properly in light of them.
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.
