Extension of capital gains tax to non-resident individuals and corporation tax to non-resident companies holding UK commercial property
At present, non-UK resident individuals and companies holding UK commercial property are generally outside the UK’s capital gains tax (“CGT”) and corporation tax regimes. However, this is due to change as from 6 April 2019.
It is proposed that disposals (direct and indirect) of UK commercial property by non-resident individuals and companies will be subject to CGT or corporation tax as applicable. This will broaden the existing regime for UK property held by non-residents introduced in April 2015 which at present only applies to UK residential property. The change has been expected for some time and brings the UK in line with the capital gains regimes of other countries, but will nevertheless represent a major tax reform for commercial property in the UK. It remains to be seen what impact the reforms will have on global investment in the UK property market and this has been a topic of debate within the industry.
In respect of commercial property held by non-resident individuals, CGT will apply to the gain made on disposal of that property after 6 April 2019 at a rate of 10% or 20% depending on whether the individual is a basic or higher rate UK tax-payer. However, the base cost of the property can be set at the market value of the property as at 6 April 2019 meaning only appreciation since that date will be chargeable.
In respect of commercial property held by non-resident companies, UK corporation tax will apply to any gain made on a disposal of the property, with the main rate being currently 19%. The same rebasing concession will apply.
Indirect disposals of commercial property are also potentially caught. This could affect non-resident individuals with a shareholding or interest in a company or entity where at least 75% of the gross asset market value derives directly or indirectly from UK property (a “property rich entity”). A CGT charge could apply on a disposal of that shareholding if this represents at least a 25% stake in the company. The shareholdings of certain connected parties are aggregated for these purposes. However, an exemption applies if the property is being used for “trade” which is widely defined as activity carried out on a commercial basis with a view to profit which can reasonably be concluded to continue. There are other conditions and timescales involved but this should mean that those with significant investments in commercial property companies will be exempt from the new charge when they sell their shares.
The draft legislation was published as part of Finance Bill 2019 on 6 July 2018 and was open to consultation until 31 August 2018 so amendments are possible in response to industry feedback, but there is not expected to be any significant movement on the general principles. Any amendments will be incorporated into the next draft of the Bill which is expected with the Autumn 2018 Budget.
Subject to the final form of the legislation, non-resident purchasers of commercial property should bear the proposals in mind and budget for the tax accordingly in future. Existing non-resident investors in UK commercial property will need to carry out valuations of their properties to establish a figure which can be used for the base cost of the property as at April 2019 and take the proposals into account when contemplating any future disposals. If the proposed tax charge is a concern, they should consider their options in good time before 6 April 2019.