The Chancellor announced in his Budget statement that he intends to bring gains made by non-UK residents from the disposal of UK commercial property within the UK tax net.
Background and new proposals
Historically, non-UK residents have not been liable for UK tax on gains made from the disposal of UK property (save where, exceptionally, the non-resident carried on a trade in the UK through a UK permanent establishment and the property was used in that trade).
This exemption from UK tax has, over recent years, been eroded by the introduction of:
- A tax liability for gains made by non-natural persons (in other words, companies) from the disposal of UK residential property with a value of, initially, £2m or higher, then extended to UK residential property with a value of £500,000 or higher
- A tax liability for gains made by most non-UK residents (whether or not a company, but excluding certain widely-held companies) on all residential property (irrespective as to value).
Now, as a consequence of this announcement in the Autumn Budget 2017, gains made by non-UK residents from the disposal of all UK property (both residential and commercial) after April 2019 are potentially liable to UK tax at the rate that would apply to an equivalent disposal by a UK resident.
Where the disposal relates to a UK property that was acquired before April 2019 it is only the gain attributable to the period from April 2019 that is liable to UK tax. Any gains attributable to the increase in value until April 2019 will not be liable to UK tax.
Indirect disposals and corporate wrappers
It would seem relatively simple for a non-UK resident to avoid a tax liability on the disposal of UK property by purchasing properties in individual corporate wrappers and then selling the wrapper instead of selling the property. But disposals of interests in such entities that derive their value predominantly from UK land are also being brought within the tax cordon.
The Chancellor has sought to prevent tax liabilities being circumvented in this way by introducing a further tax liability where a person with a 25% interest (either at the time of the disposal or within the previous five years and taking account of interests held by related parties) in the company disposes of some or all of his shareholding where the company is "property rich" (in other words, where 75% or more of its gross assets are represented by UK property).
It is intended that non-UK residents will be taxed only on gains attributable to the increase in value of UK property from April 2019. Further clarification of how this principle will be achieved in the context of indirect disposals is required. For example, it is not clear how increases in the value of a shareholding in a property rich company that is derived from other non-property assets or non-UK assets will be dealt with. It appears at first sight that non-UK residents could be liable for UK tax on the disposal of a shareholding as a result of an increase in the value of non-UK property even where the value of UK property has remained unchanged.
It follows that it will not be possible for a non-UK resident to avoid the tax liability simply by establishing a single asset company and then selling shares in the company.
However, if the company also owns non-UK property or other non-property related assets, a sale of shares in the company may not trigger a UK tax liability notwithstanding that it may also own UK property if UK property represents less than 75% of its assets. It remains to be seen whether all non-property assets are taken into account for these purposes and thus whether a liability would arise where a non-UK resident owner of a company that owns three UK properties of equal value and which has sold one of those properties (which would be subject to the tax charge) sells its shareholding at a time when the sale proceeds are retained within the company (and represent more than one-third of the value of the remaining two properties).
There will be implications for the managers of Real Estate Funds in these changes. If for example, a property is held and then sold by a non-UK company and the proceeds then paid up the Fund structure to a limited partnership, the ultimate return to investors may be reduced by the tax paid in the company and the managers' carried interest reduced accordingly. In addition a JPUT and certain other entities seem to be treated as companies. A review of the structure of offshore Groups and Funds is therefore strongly recommended.