Capital gains for overseas property owners

Lubbock Fine, 1 April 2019

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By Andy Noton, partner 
020 7490 7766

From April 2019, non-UK resident investors are to be taxed on gains arising from investing in UK land. This is a change to the rules from April 2015 where only gains on disposal of residential properties are taxed. Now this has been extended to sales of UK land or ‘property-rich’ vehicles (where at least 76% of their value is derived from UK real estate). 

The tax rates are the same as for UK investors and are:

  • 19% for corporates
  • 20% on commercial property
  • 28% on residential property for non-corporates

As is so often the case, there are some measures that can be taken to mitigate against the new-rule blow.

  • Tax will only be payable on gains attributable to value changes from April 2019, requiring property (or share) valuations from that date.
  • Investors (and connected persons) who have held less than a 25% interest in a property-rich vehicle (other than a fund) over the past two years will escape the charge entirely, on the basis that they may not know whether or not the vehicle is property rich.
  • There is to be an exemption for sale of interests in entities carrying on property-rich trades, such as retail and hotel chains or utility firms.

Tax-exempt investors (such as pension funds) stood to suffer under the new rules due to the Government having underestimated the effect of the new rules. It now recognizes that exempt investors should be no worse off than if they had invested directly in land.  Also, no double taxation should arise where sales are made by a fund and the proceeds passed to investors.

In a neat solution, the Government is to allow funds to be designated as transparent or exempt for CGT, and for gains to be taxed at the investor rather than fund level. For tax-exempt investors, this means that those gains may not be taxed at either level.

Driving the changes is a desire to level the playing field for UK and offshore investors, whilst also generating more tax revenue, and bringing the UK into line with most other major countries. But, by reducing net returns, overseas investors could find the UK becomes less attractive, which will alarm the sector, given the scale of foreign investment into UK commercial property. Coupled with Brexit uncertainty, and the application (from April 2020) of corporation tax rules to non-resident investors rental incomes, this is badly timed. It is a mystery as to why the Government didn’t use the opportunity to encourage investors to move their property from offshore structures into the UK. It would certainly have paid off to use a lighter touch. By creating a less regulated, tax-transparent UK fund vehicle and granting stamp duty land tax seeding relief to encourage “onshoring” to the UK, investors may have thought about restructuring. Instead, the rules are likely to result in increased use of offshore vehicles.

However, it is likely the SDLT advantage for investors in UK land using offshore structures is likely to be removed in the next few years. That’s the next logical step for a government seeking to level the UK and offshore playing field and generate increased tax revenue.

For further information or guidance, please speak with your contact partner or Andy Noton,