A number of changes to the way non-residents that hold UK land and property are taxed were included in the draft legislation for Finance Bill 2018-19, which was published on 6 July 2018. The first of these changes is the change to the scope of non-resident capital gains tax (NRCGT).
Since April 2015, all non-UK resident individuals, closely held companies, trustees, personal representatives and funds have been subject to non-resident capital gains tax (NRCGT) when disposing of a UK residential property.
With effect from April 2019, the scope of NRCGT will expand to cover disposals of:
- Non-residential (i.e. commercial) UK property; and
- “Substantial” interests in “UK property rich entities”, called “indirect disposals”.
Where an asset is brought into NRCGT for the first time, its value can be rebased as at April 2019 so that only the increase from April 2019 will be chargeable to tax.
Non-resident companies and unit-trusts will be taxed at the corporation tax rate (currently at 19%), while individuals and other entities will be taxed at capital gains taxes rates (10% for basic rate payers and 20% for higher and additional rate payers).
Property Rich Entities – Definition
The extended NRCGT regime defines a property rich vehicle as one which derives at least 75% of the total gross market value of its assets from interests in UK real estate and has a “substantial indirect interest” in that land. Assets matched by an intercompany liability are excluded from this definition, so related party transactions should be reviewed when calculating gross assets to ensure these balances are not included.
Substantial indirect interest – Definition
Gains on disposal of shares will be chargeable to tax where the person making the disposal holds, or has held in the last 2 years, a substantial indirect interest, being 25% or greater interest in the company or other corporate vehicle. There is an exemption though – if all of the UK property (or all but an insignificant value) has been used for trading purposes throughout the year leading up to the disposal, and it is reasonable to conclude it will continue to be so used after the disposal, then the NRCGT rules won’t apply. This should mean for example that most investments by non-resident investors in UK retail and hospitality businesses are exempt.
Interaction with certain double tax treaties
There are certain double tax treaties at present that preclude the UK from taxing gains realised by non-residents on sales of “vehicles holding UK land”. Those treaties would override UK legislation which means investors based in those jurisdictions may escape the new regime if they dispose of the vehicle holding the land rather than the land itself. There are, as expected, anti-avoidance provisions which counteract any transactions from November 2017 attempting to restructure property holdings in a way that takes advantage of tax favourable treaties.
If you are a non-resident and would like further advice on the changes to non-resident capital gains tax, contact Andrew Coney at firstname.lastname@example.org.