The current approach to CGT on property in the UK is complex. There is a divergence in the treatment of residents and non-residents in respect of non-residential property. On top of this, there is a variation in the CGT treatment depending on the type and value of property being disposed of.
- A non-resident disposing of UK commercial property will pay no CGT;
- A non-resident disposing of UK residential property will be subject to a special non-resident CGT (NRCGT) regime;
- A resident disposing of any UK property is subject to CGT / corporation tax with potential reliefs available;
- Corporates (resident and non-resident) owning property worth £500,000 or more are subject to another special regime, the "ATED related gains" charge;
- For non-resident corporates, there are complex rules governing the interaction of NRCGT and ATED related CGT.
Commercial Property in the UK
The changes in the Finance Bill 2019 will create more of a level playing field between residents and non-residents by ensuring similar CGT provisions apply to each on the disposal of UK land. This will bring the UK into line with many other countries which tax disposals of their land, regardless of the residence of the owner.
These changes could have far reaching effects. Commercial property in the UK is valued at just under £1 trillion, and investment in UK commercial property, via both resident and non-resident entities, forms a key part of insurance and pension fund investment.
What does the Finance Bill 2019 seek to do in terms of CGT?
There are three key changes which will apply from April 2019. It is worth noting that the provisions of Finance Bill 2019 are different in some respects from those set out in the consultation published in November 2017.
- Firstly, non-residents will be subject to tax on any direct disposals of any UK land;
- Secondly, non-residents will also be subject to tax on disposals of their interests in certain 'property rich' assets if they have a 'substantial indirect interest' in the underlying UK land. The rules for establishing when such indirect disposals are caught are complex;
- Finally, CGT on ATED-related gains will be abolished, which is a welcome change.
For non-resident companies, gains will be taxed under corporation tax. For all other non-residents, the tax charge will be under CGT.
Both direct and indirect disposals will need to be reported to HMRC within 30 days of the disposal. While this may not be a problem for direct disposals it may be more difficult for indirect disposals.
Direct disposals of UK land by non-residents will now result in a CGT charge (or corporation tax charge for companies). There will be a rebasing to 5th April 2019 for direct and indirect disposals, with the ability to elect for original cost instead.
An indirect disposal is the disposal of a 'property rich' asset. For example, shares in a property owning company. Property rich in this context means that at least 75% of the value of the asset, at the time of the disposal, is derived from UK land.
Non-residents will not be liable for tax on indirect disposals unless they have a "substantial indirect interest" in the underlying land In the case of a company this means an investment of at least 25% and this can include shares or loans other than normal commercial loans. It requires a consideration of the voting rights, right to sale proceeds, dividend rights or rights on a winding up. The Bill does not include the rules for the 25% test for collective investment schemes and other such entities. It is expected that these will be in a later draft.
There is an exception for assets which would otherwise be classed as property rich, where the underlying UK land is used in a qualifying trade. It will be necessary to show that all but an insignificant amount of the land is used in the course of a trade which has been ongoing for a year, and which is intended to continue.
Where interests in more than one company are disposed of under a single arrangement their assets will be aggregated to decide if the 75% test is met.
Differences from Consultation document
There are important differences between the consultation and draft legislation such as
- the trading exception for indirect disposals is a notable and welcome introduction.
- in the consultation, the proposal was that there would be a five-year 'lookback' period in determining whether a person held 25% or greater investment in a company and this has been reduced to two years.
- the much criticised reporting requirement on third party advisers has been also dropped. This is another welcome change.
- the consultation document proposed compulsory rebasing to 5th April 2019 for indirect disposals, with no option to use actual cost. It will now be possible to elect for original cost when calculating gains on indirect disposals.
- one unwelcome change is the removal of the 25% interest exemption for collective investment vehicles investing in UK land and there is to be further legislation on this.
These changes represent a major expansion of the UK tax base and will bring many non-residents into the scope of UK taxation for the first time.
Consultation with HMRC is ongoing and there will almost certainly be further changes. We do not yet have the rules for the 25% investment test for collective investment schemes and other non-corporate investors, which is regrettable given the short time left to review existing structures before April 2019.