Our summary regarding non-resident Capital Gains Tax (CGT) on property interests
We may now be familiar with the rules for non-residents disposing of UK residential property which was introduced from April 2015. From April 2019 the legislation has been widened significantly and non-UK residents will be subject to UK tax on gains arising from direct or indirect disposals of all types of UK land and interests in entities holding UK property.
We summarise the key features of these new rules but there are a number of complexities and therefore a full review of the legislation will be needed for individual cases.
Non-resident CGT in brief
From April 2019, unless an exemption applies, a non-resident will be subject to UK tax on gains arising from disposals of:
- Interests in any UK land; and
- Interests in entities deriving at least 75% of their value from UK land where the investor has a 25% or more interest in that entity.
A chargeable disposal must be reported and a payment on account of the capital gains tax liability must be paid within 30 days.
Non-resident chargeable gains post 5 April 2019 will be taxable as follows:
|Residential property||Non-residential property||Indirect Interests|
* 17% from April 2020
** depending on their marginal rate
Qualifying institutional investors (QIIs) (including registered pension schemes, life assurance businesses, sovereign wealth funds, charities, investment trusts, authorised investment funds and exempt unauthorised unit trusts) that qualify for enhanced relief under the Substantial Shareholdings Exemption (SSE) rules will be able to benefit from relief from the non-resident CGT rules providing the SSE conditions are met.
For residential property disposals the property can be rebased to its value at April 2015.
A similar opportunity for rebasing as at 6 April 2019 applies for disposals of non-residential property or land and indirect interests in UK land.
For all disposals the historical cost may be used when calculating gains, where this is greater than the respective valuations. For indirect disposals, where historical cost is used and it gives rise to a loss rather than a gain, the loss is not allowable for offset against any other gains.
HMRC do not require formal valuations however any valuation used within a calculation is subject to HMRC scrutiny and therefore it is important to maintain appropriate valuation evidence to protect against potential penalties.
Relationship with tax treaties
HMRC recognises that certain double tax treaties may not allow the UK to tax all non-resident investors (depending on their jurisdiction of residence) on gains that they realise from the disposal of UK property vehicles as certain tax treaties do not include a securitised land provision. The most notable tax treaty that does not currently have a securitised land provision is the UK-Luxembourg treaty.
Anti-forestalling rules apply and will allow HMRC to counteract tax advantages arising from the provisions of double tax treaties, where the tax payer has entered into abusive arrangements from November 2017.
Exemption for trading companies
The legislation provides for a specific exemption from these rules in relation to the disposal of property by companies where the property is used for trading purposes. The legislation is drafted quite widely but it is understood that HMRC considers this exemption to apply where there is a disposal of an ongoing trade where UK property is amongst the assets.
Collective Investment Vehicles (CIVs)
HMRC has created specific rules that apply to CIVs holding UK property. The purpose of these rules is broadly to exempt gains on disposals made by CIVs but to tax the investors on the disposal of their holdings in the CIV. The definition of a CIV is broad and includes the following:
- Collective Investment Schemes as defined in s235 FSMA 2000, including limited partnerships
- Alternative Investment Funds
- UK REITs
- Non-resident companies with features similar to UK REITs
Entities that fall to be CIVs under this definition will by default be treated as companies for the purposes of these rules, with the exception of partnerships.
Investors in UK property CIVs will not benefit from the 25% de-minimis ownership exemption noted above, such that all disposals of interests in UK property CIVs will be within the scope of these rules unless a separate exemption applies.
The expanded rules are exceedingly complex and are likely to catch a number of situations which would not be immediately obvious. Given the very short timescale for reporting and payment of tax it will be important that non-resident clients are advised of these rules even if they have no immediate plans to make disposals.