New UK property tax rules could catch investors and homeowners unawares

11 April 2019

From 6 April 2019, a single capital gains tax regime will apply to all UK land owned by non-UK residents.

The 2019 property tax reforms affect both homeowners and investors, including charities and pension funds.

From 6 April 2019, a single capital gains tax regime will apply to all UK land owned by non-UK residents.

Changes to the reporting and payment rules will also affect UK-resident landowners (from April 2020).

NQP partner Marilyn McKeever looks at the most important changes.

What are the current rules?

Non-UK residents, whether individuals, companies or trusts, do not generally pay UK capital gains tax, even if they sell UK assets.

In 2013, most non-UK resident companies became liable for capital gains tax on UK residential property.

In 2015, the government introduced “non-resident capital gains tax” (“NRCGT”), which applies to all non-UK residents including individuals and trusts as well as companies.

All non-UK residents now pay NRCGT on UK residential property.

There is no tax charge if a non-resident sells a company that owns UK residential property.

Non-residents do not pay tax on UK commercial property (e.g. shops, offices, hotels, farms or factories) whether they own the property itself or a company that owns the property. .

The changes: extension to commercial property

From 6 April 2019, non-residents will pay NRCGT on all UK real estate whether residential or commercial.

The changes: “indirect disposals”

From 6 April 2019, non-residents will pay NRCGT on a sale of shares in a company that owns UK real estate if:

• The company is “land rich”: at least 75% of its value must come from UK land. If a company is worth £1m and owns shops worth £800,000 and investments worth £200,000, the shareholders will be taxable under the new rules.
• The shareholder owns at least 25% of the company’s shares. The shareholdings of certain family members are added together to see if they meet the 25% test; or
• The shareholder (and their connected shareholders) has met the 25% test within the two years before the sale.

The new rules apply to widely held companies, not just family companies.

Rates of tax

Owners, other than companies, will pay NRCGT at 28% on residential property and 20% on commercial property.

UK companies pay corporation tax (currently 19%) on gains made on UK real estate. Non-UK companies pay NRCGT at 20% on UK real estate.

From 6 April 2020, non-UK companies will pay corporation tax in relation to UK real estate.

Collective investment schemes/REITs

At present, offshore REITS do not generally pay UK tax on their investments. Investors are taxed on distributions, but the receipts of investors such as charities and pension funds are exempt from tax under the normal rules.

The new rules will apply to widely held property investment funds. The 25% holding rule does not apply, so all shareholders are potentially taxable on sales of shares or units in a fund.

The default position is that the investment fund itself will also be subject to NRCGT, which would mean:

• The investment returns of exempt investors such as charities and pension funds will reduce, because the fund will now pay tax and will have less profit to distribute; and
• there would be double taxation because both the fund and the investors will pay tax.

Stakeholders were concerned that these proposals would result in the UK commercial property market being less attractive because of the multiple layers of taxation and the position of UK exempt investors.  As a result, the government has introduced two elections to deal with these points.

The transparency election

The effect of the transparency election is to treat the offshore collective investment scheme as a partnership for capital gains tax purposes.  This ensures that investors are taxed on the disposals of the underlying assets of the partnership only.  An exempt investor would therefore be exempt on such disposals and the collective investment vehicle itself will not be a taxable person. 

The government considers that this would be most appropriate for smaller, joint venture arrangements especially where there are a majority of exempt investors. 

The exemption election

Under this election the collective investment vehicle remains a legal person and remains notionally chargeable to tax on its gains.  The exemption election exempts the collective investment vehicle from this tax.  The investors are already chargeable on their gains when they dispose of their interests in the fund. 

This type of election is likely to be used mainly by large, widely held funds.  This election will, again help exempt investors who are concerned about tax in the underlying vehicle eroding their returns. 

There are, of course, a number of conditions for eligibility for the elections. 

Tax returns and payment of tax

Capital gains tax is normally paid as part of the self-assessment cycle. The tax for a particular tax year must be paid by the 31 January following the end of the tax year. A taxpayer who owns a number of assets can look at his gains and losses for the whole year and only pays tax on the net gains.

If a non-UK resident sells UK residential property, they must submit a NRCGT return within 30 days of the sale and any tax due must be paid at the same time.

If they sell more than one property and make a gain on the first property and a loss on the second, they must pay the tax on the gain on the first property when sold. When they make the loss, they may be able to reclaim any tax overpaid on the basis on the running total.

The government will extend these rules to all sales of UK real estate whether direct (i.e. a sale of the property) or indirect (i.e. the sale of a property owning company):

• From 6 April 2019 for non-UK residents; and
• From 6 April 2020 for UK residents.

The government has said that some transactions will be exempt from these new obligations including:

• Gifts and sales between husband and wife
• Gifts and sales of non-UK shares by a UK resident but non-domiciled individual who claims the remittance basis
• Sales of an individual’s main residence (which is exempt from capital gains tax).

Many non-resident property owners are unaware that they must submit NRCGT returns within 30 days of sale. HMRC may impose penalties on a person who fails to submit a return in time. No penalty is charged if the individual has a “reasonable excuse” for not submitting the return.

The tax tribunal has considered several cases where non-residents have said they did not know about the changes to the UK rules and that that was a “reasonable excuse”. The tribunal agreed with the taxpayer in some cases and disagreed in others!

Rebasing

Gains on the sale of commercial property and gains on all property owning companies will only be taxable to the extent they accrue after 6 April 2019.

An owner who bought a property or shares bought before that date will be treated as if they bought them for their market value on 6 April 2019. Gains that accrued before that date will not be taxable.

If the owner will not benefit from rebasing, for example because rebasing produces a gain but there has actually been a loss on the property, the owner can opt out of rebasing and calculate the gain in the normal way.

Conclusion

Property taxation is complex. Capital gains tax is only one of the taxes which affect non-residents (and UK residents) who own UK property or property owning companies.

If you would like specific advice on your circumstances, please contact a member of the team on info@nqpltd.com.