2018 UK Budget Bulletin - Taxation of gains on UK ... Budget 2018.pdf · 2018 UK Budget Bulletin - Taxation of gains on UK commercial property This publication has been prepared for

In the Chancellor’s budget on 22 November 2017, it was announced

that non-residents will become subject to UK tax on all gains

realised on disposals of all types of UK immovable property. The

proposed changes will extend the current capital gains tax (“CGT”)

regime for non-residents by bringing into charge gains realised on

disposals of non-residential (commercial) property. The changes,

which are expected to be introduced from April 2019, will affect all

disposals of UK property thereafter.

The UK government has issued a consultation on the proposed

changes, the outcome of which is expected to be published in the

spring of 2018. This measure is intended to align the disposals of

all UK immovable property made by non-residents, with that of UK

residents.

In addition, the proposed changes will not only capture direct

disposals of UK property, but they will also potentially capture any

indirect sales of UK property (certain sales of company shares

containing enveloped UK property).

Direct disposals

Under current legislation non-residents are subject to capital

gains tax on a gain realised on the sale of UK residential property

under the Non-Residents Capital Gains Tax regime (“NRCGT”)

or the Annual Tax on Enveloped Dwellings CGT regime (“ATED-

related CGT”). However, gains realised on the disposal of UK

commercial property are currently outside the scope of CGT for

non-residents.

The new rules, which bring commercial property sales into charge

from April 2019 onwards, are expected to create a single tax

regime for non-residents who dispose of UK immovable property.

In relation to disposals of UK commercial property, the relevant

gain subject to tax will be limited to any appreciation in the

property’s value that accrues from April 2019 to the date of sale.

Thus, commercial property sales will benefit from rebasing which

will require property owners to obtain a valuation of any relevant

commercial properties as at April 2019.

In addition to extending the net to capture disposals of commercial

property, disposals of residential property made by widely-held

non-resident companies (who are currently exempt from CGT) will

be brought into charge.

The applicable rate of tax for non-residents that will apply on

a sale of UK property from April 2019, will broadly be similar to

that would apply if the disposal was made by a UK resident. Thus,

insofar that the relevant non-resident owner is a body corporate,

any gain realised on the sale of UK immovable property will be

subject to corporation tax, and if the sale is made by a non-

resident individual, trust or personal representative, the charge

will be subject to CGT.

Indirect disposals

Indirect disposals of UK immovable property will be brought into

the scope of charge for non-residents from April 2019. The new

rules will look to capture any transactions of an interest in an

entity that holds UK immovable property insofar that the entity is

“property rich” and, if at the time of disposal (or at some point in

the five year period prior to the disposal), the non-resident seller

held at least a 25% interest in that entity.

LTS-TAX.COM

2018 UK Budget Bulletin - Taxation of gains on UK commercial property

2018 UK Budget Bulletin - Taxation of gains on UK commercial property

This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice You should not act upon the information contained in this publication without obtaining specific professional advice. No liability is accepted for any direct or consequential loss arising trom the use of this document. LTS Tax Limited (registration number 54292) is registered with the Chartered Institute of Taxation as a firm of Chartered Tax Advisers. LTS Tax Limited is licensed by the Guernsey Financial Services Commission. Please see our website www.lts-tax.com for details.

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Property rich transactions will be in point if, at the time of disposal,

directly or indirectly, 75% or more of the value of the assets

disposed of derives from UK land. The 75% test will be based on

the gross asset market value of the entity at the time of disposal,

thus excluding liabilities such as loan finance.

The 25% ownership test is designed to exclude minority investors

from the charge. The ownership test will consider the proportion

of interest held in the property rich entity by the non-resident (and

related parties) as at the point of sale. However, when considering

the relevant interest, the non-resident will also be required to look

back five years prior to the disposal to see if the ownership test

was met at any time during that period.

Corporation Tax

It was announced in the budget that with effect from April 2020

non-resident property holding companies will become subject

to the UK Corporation Tax regime, rather than Income Tax. This

means that income and gains will be taxed at 17%, which is lower

than the current Income Tax rate of 20%, although up until April

2019 gains on commercial property would have been fully outside

the scope of UK tax.

In addition, although the proposed rate of Corporation Tax in 2020

is lower than the current rate of Income Tax, it is likely that due to

restrictions which apply to the Corporation Tax regime on interest

relief and loss relief, the tax liabilities on rental income under

Corporation Tax are likely to be higher for a significant number of

commercial property investors.

Furthermore, UK companies have been able to benefit from an RPI

related indexation relief since March 1982 when calculating gains.

This relief however is being frozen as at 31st December 2017

and any gain arising thereafter will be fully subject to tax with no

deduction for inflation.

Conclusion

Whilst many of the proposed changes referred to above are

subject to a period of consultation, it is understood that the new

tax regime will be introduced and the consultation is therefore

likely to focus on implementation rather than principle.

These new proposals are going to have a significant effect on non-

resident property investors. Tax liabilities are likely to increase

and the added complexity of the UK Corporation Tax reporting

regime will add to the costs of compliance. It is far too early to

judge what effect this legislation will have on the UK commercial

property market as a whole, but if the changes made in the past

few years to the taxation of high value UK residential property are

anything to go by then we could be in for a rocky ride.

If you have any queries please contact:

Paul O’Neill CTA

Managing Director, LTS Tax Limited

DD: +44 (0)1481 755882 T: +44 (0)1481 755862

E: [email protected]

Simon Graham CTA

Director, LTS Tax Limited

DD: +44 (0)1481 755880 T: +44 (0)1481 755862

E: [email protected]

Francis Snoding CTA

Director, LTS Tax Limited

DD: +44 (0)1481 755881 T: +44 (0)1481 755862

E: [email protected]

Mandy Connolly CTA

Head of Tax Technical, LTS Tax Limited

DD: +44 (0)1481 755872 T: +44 (0)1481 755862

E: [email protected]

Luke Harding ATT CTA

Tax Manager, LTS Tax Limited

DD: +44 (0)1481 755867 T: +44 (0)1481 755862

E: [email protected]