The tax changes aimed at non-UK residents are happening and they are happening fast. Most of the changes and proposals outlined below were announced some time ago and should come as no surprise to non-UK residents.
The most notable changes are in relation to the taxation of UK real estate held by non-UK residents, with more changes to come in 2020.
This article explains the recent key changes on the taxation of UK property for non-UK residents and some of the potential issues that arise from them.
Extending Capital Gains Tax (CGT) to non-UK resident investors in UK real estate
The old rules
Since April 2015, all non-UK residents have been subject to UK CGT on the disposal of UK residential property.
There was no specific CGT charge for non-UK residents selling a company owning UK residential property or on sales by non-UK residents of UK commercial property.
By contrast, UK residents are subject to UK tax on their worldwide gains.
As well as providing HM Treasury with a new source of revenue, the aim behind the legislation was to remove the competitive advantage enjoyed by non-UK resident investors over domestic investors. It also aligns the UK with other major jurisdictions on taxing all gains made by non-UK residents on disposal of UK property.
The new rules
From 5 April 2019, the UK CGT will apply to all UK real estate owned by non-UK residents, whether residential or commercial.
The scope of UK CGT on non-UK residents is extended to include a tax charge on non-UK residents making a direct or indirect disposal of an interest in UK real estate as follows:
- Direct disposals by non-UK residents – applies to gains on a disposal of an interest in any UK property, not just residential property. Individuals will be subject to personal CGT (18% or 28% for residential property and 10% or 20% for commercial property). Non-UK resident companies are now subject to corporation tax (currently 19%) rather than CGT on such gains; and
- Indirect disposals by non-UK residents – applies to gains on a disposal of assets that derive at least 75% of their value from UK real estate where the person making the disposal has a substantial interest in that real estate (25% or more). This will include the shareholdings of certain connected members which will be added together to ascertain the 25% test. In addition, the shareholder must have met the 25% test within the two years before the sale.
These assets are referred to as "property-rich entities" and include interests in companies, non-corporate vehicles and collective investment companies (but most partnerships will retain their general transparency for gains purposes).
There is an exception for UK property-rich entities where all (or substantially all) of the property has been used for trading purposes. The test is based on whether it is "reasonable to conclude" that substantially all of the UK property owned by the company is used for trading purposes within the company.
There are also exemptions for foreign pension funds and certain charities.
Transactions subject to the charge must be reported within 30 days of completion (as is currently the case for non-UK resident capital gains tax) and the tax paid at the same time. For non-UK companies (on a disposal of UK property on or after 6 April 2019) the reporting deadline is extended from 30 days to three months.
For direct disposals this may not be an issue provided the information on base cost is obtained in advance. However, for indirect disposals this may be more difficult if it is unclear whether the 25% threshold has been exceeded within the previous two years.
To ensure parity in tax treatment between UK and non-UK residents, from 6 April 2020 the 30 day time limit for submitting a return will also extend to UK residents.
For property assets coming within the scope of the new rules for the first time, there is an optional rebasing as of 5 April 2019. This ensures that only the gains on the UK properties arising after the relevant dates are charged to CGT.
An election can also be made to retain historical cost and the gain can be calculated in the normal way.
For UK residential property, the April 2015 base cost is retained, but as before, it is still possible to use actual base cost instead.
The new rules include a targeted anti-avoidance provision to prevent abuse and will catch arrangements entered into with a main purpose of avoiding the new rules.
Other changes to the tax regime
The changes to the CGT regime are not the only challenges forthcoming for non-UK residents. From 6 April 2020, there will also be a transition by non-resident corporate landlords from income tax to corporation tax. The rate of corporation tax is currently 19%, but is scheduled to reduce to 17% from 1 April 2020.
To many this is a welcome relief as non-UK resident companies are currently subject to income tax at 20% on rental income. However, the changes mean that corporate landlords will be subject to the Corporate Interest Restriction (CIR) Regulations. These can restrict the interest deduction which a company can claim depending on the interest, taxable profits and (where relevant), the consolidated group position.
Stamp Duty Land Tax (SDLT) proposals
The UK government intends to increase SDLT for non-UK residents adding 1% to the SDLT charge for non-resident purchasers of freehold and leasehold residential property in England and Northern Ireland.
HMRC opened a consultation seeking views on the government’s proposed 1% SDLT surcharge which closed on 6 May 2019.
Under the proposals, the additional charge will apply to non-UK resident individuals and for joint purchases, the charge will apply if any or all is non-resident. The rules also apply to ‘non-natural’ persons (broadly, companies, partnerships and trusts) if they are controlled by non-UK residents.
The consultation proposes a simplified residence test so that the surcharge applies to individuals who have spent less than 183 days in the UK in the 12 months prior to acquiring a residential property. The surcharge can be reclaimed in the event that the 183-day limit is exceeded in the subsequent 12 months.
The SDLT policy does not apply to non-UK corporate investors and the proposed changes seem at odd with the government's aim to achieve a level playing field between domestic and non-UK resident investors.
The consultation ended on 6 May 2019 and it is hoped that the government will think carefully about the proposals it has outlined.
The proposals risk sending a negative message to non-resident buyers and whether it will generate the additional revenue the government expects remains to be seen.
Exit for non-residents
Consequently when considering the impact of the CGT regime it needs to be remembered that non-UK residents will feel the burden of the higher taxes cumulatively with any changes to corporation tax and SDLT. As a result, the effect of the CGT changes must be evaluated in the context of wider tax reform.
The above changes and future proposals herald a dramatic change to the taxation treatment of non-UK residents investing in real estate. It may be unwelcome news for non-residents but it is good news for UK residents who will feel positive about the government's attempts to achieve a level playing field. Non-residents may feel deterred by the changes and only time will tell what the real and long term impact of these changes (on top of all the other recent changes) will be on entries in and out of the UK.
It should also be remembered that for some, the UK tax regime is not the determinative factor for choosing where to invest. The UK has a multitude of other attractions for high net worth individuals, for instance a secure jurisdiction in which to invest.
For those who would still wish to invest in the UK, careful planning will be even more essential to organise transactions and structure investments around these changes to ensure optimum tax efficiency.