Disposal of UK real estate investments by offshore investors


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From April 2019, reforms to UK tax rules will have a major impact on non UK real estate investors who hold UK property. 

Tax Regime in Outline

Capital gains accruing from 6 April 2019 on any UK property interest, whether commercial or residential, that is held by a non-UK resident will be within the charge to UK tax (a NRCGT tax charge).

The rate of tax chargeable on the gain for individuals will be:

  • 18%/28% for residential property;
  • 10%/20% for non-residential property; Corporates will be liable to corporation tax on NRCGT, the current rate being 19%;

The NRCGT charge applies to both direct and indirect disposals of property. A direct disposal is a conventional sale of property. An indirect disposal is a disposal of an asset that derives its value from UK real estate.

The tax charge on indirect disposals of assets is intended to catch, for example, the disposal of shares in a company which holds UK real estate.

The tax charge will only apply to the disposal of an interest in a "property rich" corporate entity. To qualify as such, the following conditions must be met:

  • A "property rich" corporate entity means, in broad terms, a corporate entity which, at the time of disposal, derives at least 75% of the total gross market value of its assets from interests in UK land (either direct or indirect ownership of the land by the entity).
  • The seller must have a "substantial interest" in the corporate entity. In broad terms, this requires the seller, together will certain connected persons, to own, or at some point in the two years prior to the time of disposal, to have owned, at least a 25% investment in the company being disposed of.

Reliefs

Investors who are exempt from UK tax other than by reason of being non-UK resident e.g. sovereign wealth funds will continue to be exempt. Some disposals may qualify for the substantial shareholding exemption and collective investment vehicles may be able to make an election to obtain beneficial tax treatment.

Base cost

In respect of commercial property and indirect disposals, only the gain accrued after 5 April 2019 will be subject to tax. In the case of direct disposals of residential land held prior to 5 April 2015, April 2015 rebasing is available and original cost can also be used in certain circumstances.

Reporting and payment of tax

Subject to certain exemptions, any disposal as from 6 April 2019 of UK land (direct or indirect, residential and non-residential) by a non UK resident (including companies) must be reported and any tax paid within 30 days of completion. Even if there is no tax due, or a property or an indirect interest is sold at a loss, the taxpayer must file a return.

Valuations

Non residents who hold commercial property or shares in property rich entities should consider getting their property or shares valued as at 5 April 2019, whether or not they anticipate future sales, in order to calculate tax liabilities on future sales. Investors should also maintain evidence of any asset management initiatives that enhanced the value of their property prior to April 2019, as this may help to mitigate the quantity of capital gains paid post April 2019

Conclusion

With effect from 6 April 2019, non-UK resident investors must pay tax on all UK land disposals - residential and commercial - and on disposals of "property rich" corporate assets.

This article is taken from Private Wealth newsletter - May 2019

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