Taxation, Wealth management
Non-resident CGT changes – the new UK tax rules on property-rich companies
Yet further changes to the taxation of UK real estate have been introduced. Since 6th April 2019, the scope of UK Capital Gains Tax (“CGT”) has been extended to catch gains on the sales of shares of companies whose assets consist of, to a substantial extent, UK real estate.
The convenient shorthand term for such companies is “property-rich companies”. Despite the introduction of the non-resident CGT on disposals of UK residential property in 2015, the disposals of shares in property holding companies remained a “safe haven”. This is no longer the case.
The new rules apply if:
- the company is “property rich” (i.e. if 75% or more of its value derives from UK property). The disposal could be of shares in a company that directly owns the UK property, or a parent or holding company of a subsidiary holding UK property. Where more than one company is sold, complicated rules apply to work out whether, 75% of the value of the companies derives from UK property, in aggregate; and
- the non-resident (and related parties) hold, or at some point in the previous two years have held, at least a 25% interest in the share capital of the company
The legislation is not, in fact, confined to disposals of shares. In principle, disposals of other interests in property-rich companies will also give rise to a tax charge.
Calculating the liability
The Capital Gains Tax charge for non-residents selling shares in companies holding UK residential property is calculated using the following rules:
- For the purposes of the non-resident tax charge, gains will be calculated using the market value of such interests as of 5th April 2019. In other words, rebasing will be allowed and only those gains accruing after 5th April 2019 will be chargeable to UK tax
- Non-resident companies will pay corporation tax at the applicable rate. This is currently 19% but the rate is expected to decrease to 17% from 1st April 2020
- Non-resident individuals and trustees will pay CGT at 10% or 20%, depending on whether they are basic rate taxpayers or higher rate taxpayers
However, there are exemptions available. For example, when the underlying UK land is used for the purposes of a qualifying trade which has been carried on for at least a year prior to the disposal and will continue after disposal. Where this is the case, the 75% UK land condition is deemed not to be met.
There is also a relief for disposal of interests in multiple companies, where they are linked. Various conditions need to be met for the disposals to be linked, one of which is that the acting individual is connected with both/all companies whose shares are being disposed of. The assets of those companies are then aggregated for the purposes of the 75% UK land condition as mentioned above.
Reporting and payment obligations
Where the disposer is an individual or trust, there will be a requirement to report the disposal to HMRC and pay any CGT that is due within 30 days of the disposal.
Where the disposer is a company, and therefore subject to corporation tax, it will have to register with HMRC within 90 days of making its first disposal. Payment of tax is usually nine months and one day after the end of the accounting period.
UK property held by non-residents has been a particular target for tax changes in recent years. The intention of these new rules is to align the UK with other countries and remove the advantage which non-residents benefit from.
The Government’s campaign of reform to the rules on the taxation of UK land is ongoing and it shows no signs of slowing down. But where does it end?
At present, UK property holding companies that are incorporated outside of the UK incur no Stamp Duty Land Tax (“SDLT”) when transferring shares outside of the UK. The government might try to close this obvious gap – watch this space!
For more information and advice regarding non-resident CGT changes, please contact our tax team.