Following the Autumn Budget 2017, HMRC have published ‘Taxing gains made by non-residents on UK immovable property - consultation’. This follows the chancellor's announcement that non-resident capital gains tax will be extended to include all UK property.
The UK is moving further towards a more common international practice and exercising its full taxing rights where non-residents dispose of UK property.
From 6 April 2015 the UK has taxed Non-residents on Disposals of UK Residential Property. It is proposed that from April 2019 this will be extended to all other UK property. Companies will be subject to Corporation Tax (CT) and others to Capital Gains Tax (CGT).
The new rules will also extend the tax on residential property to capture indirect disposals, and introduce anti-forestalling rules which apply from Budget day, 22nd November 2017, and a new Targeted anti-avoidance rule (TAAR).
Anti-forestalling and TAAR
The anti-forestalling rules will counteract arrangements entered into on or after 22 November 2017 that seek to obtain a tax advantage by trying to exploit protection clauses within some Tax Treaties ('treaty shopping).
The new TAAR will apply from April 2019 and will apply to counteract arrangements entered into where the main or one of the main purposes of the transaction is to secure that gains are not subject to the new rules.
Direct disposals of non-residential property
- The property can be rebased on 1 April 2019 for companies and 6 April 2019 for other. This means that only the gain after this is effectively taxed.
- There will be an optional ‘full calculation’ which will benefit those with losses.
- There will not be a third ‘straight-line apportionment’ method.
- The rates will be the same as for UK residents (i.e. the normal CGT rates apply to individuals and CT rates to companies).
- CGT losses on these disposals will be available to set against other immovable property gains (residential and non-residential).
- CT losses on these disposals will be available to set against any other company gains.
- Rollover relief will be available for business assets.
Indirect disposals of immovable property
- Applies to both residential and non-residential property.
- Disposals subject to tax if:
- Entity is property rich:
- Gross-asset value of company is 75% or more represented by UK immovable property (based on market values).
- Can also apply to the sale of a holding company if, overall, taking into account subsidiaries, the group is ‘property rich’.
- Non-resident, with connected parties, owns 25% or more of the entity, or has done at any point in the five years prior to disposal (which may include pre April 2019 periods).
- Entity is property rich:
- The gain will be based on the interest disposed of and normal disposal of shares rules will apply, including anti-avoidance.
- Rebasing to April 2019 will be the only acceptable calculation method for indirect disposals.
- Substantial shareholdings exemption may be available for companies making an indirect disposal, as long as the conditions are met.
- It is acknowledged that in some cases, the Tax Treaties in force may override this treatment.
- Collective investment vehicles (CIVs), such as REITs, will be brought within the rules and non-resident investors will be subject to tax on disposals where the property-rich and ownership tests are met.
Disposals of residential property
- The existing NRCGT rules will be extended so that to apply to non-close companies (widely-held companies) and indirect disposals.
- The exemption in NRCGT for gains made by life assurance companies will be removed.
- The NRCGT rules will be changed so that companies are subject to CT not CGT.
- Widely-held companies will rebase to April 2019.
- Individuals, trusts, personal representatives and close companies will continue to rebase direct disposals to April 2015.
- Indirect disposals will be rebased to April 2019 for all owners.
ATED- related CGT
- May be merged with the new UK immovable property rules:
- For close companies:
- Pre April 2015 gains would be subject to ATED CGT.
- April 2015 – 2019 subject to NRCGT rules.
- Post April 2019 taxed under new immovable property rules.
- Non-close companies would be subject to ATED CGT until April 2019 and then under new rules for proportion of gain post April 2019.
- Return and tax will be due within 30 days of disposal
- If registered for self-assessment, then tax will can be deferred until normal payment date
- For CT, company will have to register for CTSA and file return within CT framework with a one day accounting period (unless already registered in which case it would use its normal accounting period).
- Rules will be brought in for advisors on reporting. Advisors will be required to report details of the disposal if:
- They are UK based advisors.
- Received fees for advice or services related to a transaction which could fall within these rules.
- The advisor has reason to believe a contract for the disposal of UK property has been concluded within these rules.
- The advisor cannot satisfy themselves that the transaction has been reported by the seller.
- There will be a 60 day time limit for advisors to make this report.
- Rules allowing tax to be recovered from UK representatives or related companies will be introduced
- Penalties will apply in same way as the normal failure to notify and late or incorrect returns penalties.
The consultation is open until 16 February 2018 and the full document can be found here.
Summary of questions:
Chapter 2 Scope of the Measure
- Are there any issues specific to non-residents when considering how they fit into the UK definitions of persons chargeable to UK tax (CGT or CT)?
- Do you see any issues or complications arising with respect to rebasing which need to be addressed?
Chapter 3 Direct disposals
- Do you agree with the basic principle that gains on direct disposals within these new rules should be computed using the same computational rules as other chargeable gains?
- Further to the specific modifications identified, are any other changes needed to recognise differences in how the tax system applies to non-residents?
- For businesses: Will the proposals for direct disposals mean that your company will now be required to register for UK CT?
- For businesses: Will the proposals for direct disposals lead to an increase in your administrative burdens or costs? Please provide details of the expected one-off and ongoing costs.
- For individuals: Will the proposals for direct disposals mean that you will be required to pay Capital Gains tax for the first time?
Chapter 4 Indirect disposals
- Do you consider that the rules for indirect transactions are fair and effective?
- Are any other conditions necessary to ensure the policy is robust in meeting the objective of taxing non-residents on gains on indirect disposals?
- For businesses: Will the proposals for indirect disposals mean that your company will now be required to register for UK CT?
- For businesses: Will the proposals for indirect disposals lead to an increase in your administrative burdens or costs? Please provide details of the expected one-off and ongoing costs.
- For individuals: Will the proposals for indirect disposals mean that you will be required to pay Capital Gains tax for the first time?
Chapter 5 Disposals of residential property
- Do you consider that it is right to harmonise ATED-related CGT given the changes proposed in this document?
- Are there any issues, risks, or complexities created by harmonising the ATED-related CGT rules in the manner proposed, and how can these be addressed?
- For businesses: Will the proposals for disposals of residential property mean that your company will now be required to register for UK CT?
- For businesses: Will the proposals for disposals of residential property lead to an increase in your administrative burdens or costs? Please provide details of the expected one-off and ongoing costs.
- For individuals: Will the proposals for disposals of residential property mean that you will be required to pay Capital Gains tax for the first time?
Chapter 6 Collective Investment Vehicles
- Do you agree with the general approach to ownership of non-residential property through CIVs outlined above?
- Will the proposals for CIVs mean that you will now be required to register for UK tax?
- Will the proposals for CIVs lead to an increase in your administrative burdens or costs? Please provide details of the expected one-off and ongoing costs.
- Are there changes needed to the rules for CIVs, particularly around exemptions, to ensure a robust system of taxing non-residents on gains on disposal of interests in UK property?
- Are there any specific circumstances where the treatment of gains on non-residential UK property should be different to the treatment of gains on UK residential property in the context of a CIV?
- Do you have any further comments on the taxation of gains on non-residential UK property held through CIVs?
Chapter 7 Reporting and compliance
- Do you foresee any difficulties with the reporting requirements for the seller?
- Do you foresee any difficulties with the charge on the UK group company?
- Do you agree with the proposal to use the normal CT Self-Assessment framework?
- Will the proposed information and reporting requirements lead to an increase in your administrative burdens or costs? Please provide details of the expected one-off and ongoing costs.
- For third-party advisors: what is the best way to ensure the proposed information and reporting requirements do not lead to an undue increase in your administrative burdens or costs? Please provide details of likely one-off and ongoing costs in respect of any options or proposals.
- What channels and methods should HMRC use to raise awareness of this change in the law, to ensure that affected non-residents will know that they are impacted?