From April 2019 non-residents will be subject to capital gains tax on the disposal of all UK real estate.
The Government has announced that it intends to tax gains made by non-residents on the disposal of all types of UK real estate from April 2019. A consultation document has been published setting out details of how the rules are expected to apply.
Currently only gains made by non-residents on the disposal of residential property are subject to UK tax although there is an exemption for certain widely-held non-resident companies. The new rules will create a single regime for the disposal of both residential and commercial real estate and will remove the current exemption for widely-held non-resident companies. We anticipate that the widely-marketed scheme exemption will also be removed although this is not specifically mentioned in the consultation document.
In addition, the new rules will extend to indirect disposals of ‘property rich’ entities such as companies, partnerships and property unit trusts. Broadly, a non-resident investor holding a 25% or greater interest in an entity that derives 75% or more of its gross asset value from UK real estate will also be within the scope of the new rules. The rules could also apply to an interest in settled property deriving its value directly or indirectly from UK land and to any option, consent or embargo affecting the disposition of UK land. The indirect disposal rule will also apply to a non-resident investor who holds 25% or more of the shares in a UK-REIT.
Any interests held by related parties to the non-resident at the date of disposal or within the prior five years will be taken into account when calculating whether the 25% test is met.
HMRC acknowledge that relief from tax on indirect disposals may be available under certain double tax treaties where those treaties do not contain a securitised land provision. Such treaties include Luxembourg but not Isle of Man, Jersey, Guernsey or Netherlands. However, an anti-avoidance rule has been introduced to deny treaty benefits to non-residents who enter into any arrangements or restructuring on or after 22 November 2017 with a view to benefitting from such double tax treaties.
The new rules will apply only to gains attributable to changes in value from 1 April 2019 (for companies) and 6 April 2019 (for other persons). April 2019 will therefore be a rebasing point for widely-held non-resident companies on all disposals of UK real estate and for all persons on all indirect disposals.
Rollover relief will be available to allow non-residents to defer gains on the disposal of certain business assets used for trade purposes. However, we would expect that this may be of limited use in practice.
Sovereign immune investors, registered pension schemes and overseas pension schemes will retain their existing tax benefits but could be indirectly affected depending on the nature of their holding structure.
Qualifying institutional investors may also benefit from the extended Substantial Shareholding Exemption rules that apply to the disposal of property rich companies or groups of companies.
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