Currently, a non-resident is not within the scope of UK capital gains tax in respect of gains arising from the disposal of non-residential/commercial property.
The disposal of UK residential property by a non-resident can fall within the scope of either the ATED capital gains tax regime, which taxes certain gains accruing after April 2013, or Non- Resident’s Capital Gains Tax on Residential property (‘NRCGT’) regime, which taxes certain gains accruing from April 2015. Within the NRCGT regime, there is an exemption from the charge for widely held companies on the disposal of their residential property interests.
No capital gains tax liability arises on non-residents who dispose of interests in companies that hold UK land interests.
The Government has announced that from April 2019, it is intended that all gains from all types of UK land should fall within the scope of UK tax, with the only exemption being for qualifying institutional investors.
In addition, gains arising from the disposal of “property rich” entities will be also subject to UK tax from this date.
Whilst the changes proposed have been published as part of a Consultation document dated 22 November, it is clearly stated that “some aspects of the reforms are fixed, such as who is in scope, commencement date, and core features of the direct and indirect provision..”.
Non-residents who are body corporates will be subject to corporation tax on the resultant gains. All other persons will be chargeable to capital gains tax.
Direct disposal of land by non-residents
All gains accruing on disposal of interests in UK land will become chargeable to UK tax. For non-residential property, only gains attributable to the increase in value from 1 April 2019 (for companies),6 April 2019 (for other persons) will be taxable. A rebasing to the April 2019 value will be the default position – however it will also be possible to elect to compute the gain/loss using the historic cost as the base cost of the property.
For residential land within the NRCGT regime, the rebasing date will remain April 2015. The NRCGT regime will also be extended such that gains on residential property within widely held companies will no longer be exempted.
Indirect disposal of land by non-residents
Where, at the time of disposal, 75% or more of the value of an asset is derived from UK land (either residential or commercial) and the non-resident holds 25% or greater interest in that entity (or did at any point in the previous 5 years), this disposal will also fall within the scope of UK tax. As with direct disposals, there will be a rebasing to the April 2019 value – however unlikely direct disposal it is not proposed to allow for alternative computation methods.
The value test will be applied based on a gross asset value i.e. not including any debt within the entity.
For indirect disposal, it is also proposed that a reporting requirement will be placed on UK based advisors who are aware of the transaction.
In addition to these above proposals, an anti-forestalling rule will be introduced to be applied to arrangements entered into on or after 22 November, where non-residents are looking to exploit provisions in certain double tax treaties, particularly in relation to the indirect provisions. A Targeted Anti-Avoidance Rule, similar to that in place for Property Development tax, will also be applied to counter arrangements entered into where the main or one of the main purposes is to secure that gains are not subject to these new rules.
These changes will affect all non-residents, other than qualifying institutional investors, who hold interests in UK property, either directly or indirectly.
Gains accruing on non-residential/commercial property after April 2019 will fall within the scope of UK tax. In addition, the remit of NRCGT on residential property is to be widened to include widely held companies.
Gains accruing after April 2019 on “property-rich” entities will also fall within the scope of UK tax, where the non-resident owns a 25% or greater interest.
For advisers involved in the transactions, there will also be an additional reporting obligations, particularly in respect of indirect disposals.
As noted above, the announcement within the Budget is subject to consultation. However, the direction of travel is clear and whilst there may be some changes at the edges, the intention is to subject all gains arising from UK property to UK tax.