The UK Government has announced in today's Budget (22 November) that it is launching a consultation on extending the scope of UK tax on real estate.
Currently, non-UK residents who are investors in UK land and buildings are outside the scope of UK tax on gains on commercial property. They pay income tax on the net rental income but not on gains on disposal. Currently, only gains on UK residential property are within scope of tax for non-resident investors but subject to significant exemptions, in particular for widely-held companies.
It is proposed that, from April 2019:
- All non-residents will be liable to tax on gains on disposal of UK property. They will pay corporation tax if companies and capital gains tax otherwise.
- Only the gain post April 2019 will be in scope. There will be a rebasing to April 2019 values, with options to elect for a different treatment if disadvantageous – for example where there is a latent loss at that date.
- The charge will be extended to the disposal of "property-rich companies" – i.e., those where 75% or more of its gross asset value at disposal is represented by UK immovable property. This is tested by ignoring any debt in the company. Only those who own, or have done at some point within the five years prior to the disposal, a 25% or greater interest in the entity are caught by this part of the legislation.
- Interests in partnerships, trusts, collective investment vehicles will all be in scope, provided the property richness and ownership threshold tests are met.
- The rules will create a single regime for disposals of interests in both residential and non-residential property, introducing a new charge for gains on disposals of commercial property and extending the current rules for residential property to indirect sales and disposals made by widely-held companies.
- The Government acknowledges that the terms of any relevant double tax treaty will be relevant. Some treaties may not allow the UK to tax interests that are not represented by shares in companies or, in other cases, where the UK property is held two or more layers down in a group structure and the "property richness" test is not met at the top-tier level. Anti-forestalling measures are being introduced to stop "treaty shopping" to move UK property assets into more favorable jurisdictions.
- The consultation is open until 16 February 2018.