Fundamental changes are to be made to the way non-UK residents are taxed on the sale of interests in, and income arising from, UK real estate:
These changes present opportunities to restructure – such as "on-shoring" real estate to UK chargeable gains exempt vehicles – which the DWF Corporate Tax can assist with.
From April 2019, non-UK resident individuals and trusts will be subject to capital gains tax and non-UK resident companies will become liable to corporation tax on chargeable gains made on direct and indirect disposals (including sales and gifts) of interests in UK real estate.
All gains made on the disposal of real estate in the UK will be brought into charge for UK tax, wherever in the world the individual or entity is resident. Currently non-residents may be charged tax on gains on the sale of some residential real estate only but this regime change extends taxation to the sale of commercial real estate and all residential real estate.
The tax charge will apply to the sale of land, and any buildings and fixtures contained on the land, as well as land under the sea or otherwise covered by water, therefore including offshore windfarms and similar structures within the charge to tax if they are within UK territorial waters.
There will be an additional charge to tax on gains made on the sale (or other disposal) of an interest in a property-rich entity by a non-UK resident, meaning an extra tax charge when a non-resident sells shares in a company which owns real estate. The charge will apply to the sale of property-rich entities, which derive 75% of their gross asset value from UK land. Where a number of entities are sold together, their gross assets are aggregated for the purpose of this test.
Investors who hold less than a 25% interest in the entity, directly or through other entities, with a two year look-back, will not be subject to charge.
There is a trade-use exemption so that disposals of interests in property-rich entities which are trading from the property before and after the disposal will not be chargeable disposals. Owners of companies carrying on retail, leisure, hotel and hospitality trades are likely to be the primary beneficiaries of this exemption.
For both direct and indirect sales, there will be options to calculate the gain or loss on a disposal using the original cost of acquiring the asset or re-basing to the value in April 2019.
There are a number of complexities in how these new rules will apply to collective investment vehicles, and the Government is expected to provide more detail when the Finance Bill is published on 7 November 2018. Please contact the Corporate Tax team if you would like to know more about the impact specifically for collective investment vehicles.
HMRC will require a payment on account and the filing of a return within 30 days of certain disposals.
From April 2020, non-resident corporates will become liable to corporation tax, rather than income tax, on income arising from UK real estate.
Due to the shift in regimes, whilst it may on the face of it look like a reduction in applicable taxation rate (20% rate of income tax and expected corporation tax rate of 17% from April 2020), it may mean that income from real estate is subject to taxation to a greater extent than it was previously.
The change brings in a raft of corporation tax limitations obligations and computational rules including the deductibility of interest rules and imposes a different treatment for the taxation of loan relationships.
Transitional provisions will allow for a limited carry forward of certain existing income tax losses for use under the corporation tax regime. Non-resident companies will be required to adapt to the different filing and payment regime of corporation tax.
The DWF Corporate Tax team can advise on the impact of these legislative changes, the availability of exemptions and reliefs and "on shore" tax-advantaged structures such as Real Estate Investment Funds ("REITs") and Property Authorised Investment Fund ("PAIFs").
The Government is expected to publish more detail after the budget on 29 October 2018, and more detailed legislation when the Finance Bill is subsequently introduced before Parliament on 7 November 2018. We will be keeping a close eye on developments and will provide further updates.
If you would like to know more, please speak to your usual DWF contact or a member of the DWF Corporate Tax team.