1. What does the draft Finance Bill 2018/19 say about the treatment of UK property held by non-UK residents?
From April 2019, gains subsequently arising on any UK property, including commercial and residential property, will be chargeable to UK tax. The existing exemption for the disposal of residential property that is diversely held will be removed but the Annual Tax on Enveloped Dwellings (ATED)-related capital gains tax will also be abolished.
In addition, gains arising to non-UK residents on the disposal of shares, which derive their value from UK property, will also be taxed where certain conditions are met.
From 6 April 2020, the Finance Bill confirms that, those companies currently liable to UK income tax on rental income – ie non-resident landlords, will fall within the scope of UK corporation tax on such income.
2. What points in the original HMRC Consultation remain outstanding?
The treatment of Collective Investment Schemes remains an area of uncertainty. The UK Government is reviewing consultation responses to decide how to, principally, treat tax-exempt investors.
Two alternative proposals have been suggested:
- Introducing an election regime such that non-UK resident investors benefit from tax transparency in the offshore fund or
- For offshore funds that are non-closely held, electing that gains in the structure are not taxable but a disposal of the interest in the fund will be taxable.
Option B would only be available when the fund agrees to certain reporting requirements.
There is widespread concern that there is very little time for draft legislation to be made available to stakeholders, comments incorporated and final legislation to be released.
3. What are ‘land-rich’ companies?
The consultation (and the draft Finance Bill clauses) introduced the term ‘land-rich’ companies and that the disposal of so-called ‘land-rich’ companies will be subject to taxation from April 2019.
A land rich company is one that derives at least 75% of its value from UK land. In this calculation, certain non-property assets are excluded (such as non-property assets that have been funded by a related party transaction). For example, where a property company provides a loan to a connected company to acquire an asset other than UK land, it will not be possible to argue that the borrower is not a land rich company. Whilst this provision is, at its heart, anti-avoidance legislation, existing arrangements may need to be reviewed to ensure that a group does not inadvertently make a disposal in 2019/20 of a business that will then qualify as a land-rich company.
4. Are there any exemptions for land rich companies?
As a result of the consultation process, the UK Government has announced an exception to these rules for UK land used for trading purposes. In short, where UK land is used for a ‘qualifying trading’ purposes, then the disposal of the company is not treated as a disposal of a land-rich company.
The definition of a qualifying trading purpose is, unsurprisingly, detailed. It requires that:
- The qualifying trade is carried on by the property owner (or by a person connected with the property owner) for at least one year prior to the disposal,
- The trade operates on a commercial basis and
- It is carried out with a view to the realisation of profits
- It must also be ‘reasonable to conclude’ that the trade will be continue to meet these tests for more than an ‘insignificant period of time’.
Clearly, this definition creates a number of uncertainties and I would expect there be many cases where it will be difficult to conclusively prove that the exception applies. However, the Substantial Shareholding Exemption may also apply to exempt gains from the disposal of trading companies.
5. What should investors in UK property be doing?
Ultimately, the changes are aimed at putting the UK on a level playing field with the taxation treatment for property gains of non-residents applied by most other countries. Importantly, it removes the competitive advantage that non-UK residents have over resident investors by virtue of their tax status.
There are certain matters, however, that investors should be attending to sooner rather than later. As commercial properties will be ‘rebased’ at the date that the new rules are introduced, it is advisable to obtain valuations of both properties and land rich companies at this date.
Investors in UK property will want to review their business models: simplifying non-UK structures may be appropriate and assessing the potential of alternative structures (such as REITS) will be on the agenda of many firms. We expect to see an increase in activity in the REIT marketplace. Of course, advance planning should take into account the fact that non-resident landlord corporate investors will fall within UK corporation tax from April 2020. This means that the UK’s ‘corporate interest restriction’ legislation may apply to them and could have a significant impact on their overall returns.
