Until relatively recently, there were significant tax advantages for overseas investors who owned property in the UK. These advantages are slowly being removed either by enacted or proposed legislation.
Whilst not covered in this note, the ATED (“annual tax on enveloped dwellings”) legislation which was introduced in April 2013 was the start of the process of change.
Capital gains tax
Until April 2015, capital gains arising to non-UK residents (companies and individuals) on the sale of UK property were generally exempt from UK capital gains tax (“CGT”), though the ATED CGT rules could potentially apply for companies. This was often a major incentive to own property in the UK. However, with effect from 6 April 2015, the UK has imposed CGT on gains made by non-residents on the disposal of UK residential property. It is important to note that, where a property was owned at 6 April 2015, it is only the gain arising after this date which is taxable (derived either by a valuation or time apportionment). Where properties are acquired after this date and then sold, the whole gain is taxed.
The rate of tax applying is 28% for individuals or 20% for companies.
The disposal of a relevant property has to be reported to HMRC within 30 days of the disposal whether or not there is any tax payable. If the seller is not within the UK’s self-assessment regime the tax must be paid within the same 30-day time frame. If the seller is within the self-assessment regime (for instance if they are subject to tax on property rental income), the tax is payable on or before 31 January following the tax year in which the disposal took place.
It should be noted that if a sale by a company falls within both the ATED and above non-resident capital gains tax regimes, the former takes priority for tax purposes. However, there will still be a filing obligation to report both gains and both regimes have different filing deadlines.
2. Commercial properties
The UK government has proposed that, with effect from April 2019, CGT will be extended to gains made by non-residents (again both companies and individuals) on the disposal of UK commercial property.
It is also proposed that from April 2019 certain share disposals made by non-residents, where the shares derive significant value from UK property, may also become subject to UK tax.
Legislation in respect of the above is being drafted and more detail on these proposals would be expected by later this year.
3. Non-UK resident companies
It is proposed by the UK government that, with effect from April 2020, non-resident companies holding UK investment property will be brought within the scope of UK corporation tax.
This change may, on the surface, appear to be beneficial as such companies will then become subject to corporation tax, which is then expected to be at a rate of 17%, as opposed to income tax which is charged at 20%, on their rental profits. However, the proposed change will bring non-resident companies into the scope of UK corporation tax rules and so these companies will be exposed, for example, to the corporate interest restriction rules and the rules which can restrict the usage of tax losses brought forward. Notwithstanding the reduction in tax rate, such companies could therefore face greater tax costs.
Historically, owning UK residential property through a non-UK resident company was a method commonly used by non-UK domiciled individuals to ensure that such properties were not subject to UK inheritance tax. However, with effect from 6 April 2017, this planning is no longer effective where UK residential property is held by a non-UK “close” company. In such circumstances, the value of the shares in this company which is attributable to the UK residential property is within the scope of inheritance tax.