It was announced in last year’s Autumn Budget that, from April 2019, tax will be charged on gains made by non-UK residents on the disposal of all types of UK immovable property.
At the time of the announcement, HM Revenue & Customs also produced a technical note setting out the scope of the new charge and application of the anti-forestalling rule.
These changes extend the rules that currently apply to non-UK residents on disposals of UK residential property.
Scope of the new charge
This measure expands the scope of the UK’s tax base with regard to the disposal of immovable property by non-UK residents in two key ways:
- All non-UK resident persons’ gains on direct disposals of UK land will be chargeable.
- Indirect disposals of UK land will be chargeable.
Direct disposals by non-UK residents
- Applies to non-residential property.
- The value of the property can be rebased on 1 April 2019 for companies and 6 April 2019 for other persons, which means only the gain accruing after this date is taxed. Otherwise, the original acquisition cost will need to be used.
- The rate of tax will be the same as for UK residents (ie. the normal capital gains tax rates apply to individuals and corporation tax rate to companies).
- CGT losses on these disposals will be available to set against other immovable property gains (residential and non-residential).
- Corporation tax losses on these disposals will be available to set against any other company gains.
- Rollover relief will be available for business assets, subject to the normal rules and requirements for relief.
Indirect disposals by non-residents
- Applies to residential and non-residential property.
- Applies when a non-UK resident investor disposes of an interest in “property rich” entities (an entity that derives 75 per cent or more of its gross asset value from UK property) and at the date of disposal, or at any point in the two years prior to that date, the non-UK resident holds, or has held, a 25 per cent or greater interest in the entity.
- Any interests held by connected parties to the non-UK resident at the date of disposal, or within the prior two years, will be taken into account when calculating whether the 25 per cent test is met. “Connected” in this context has its own special definition.
- The value of the property can be rebased in April 2019 as for a direct disposal but, if the original acquisition cost is used, a loss will not be an allowable loss.
Anti-forestalling rule and targeted anti-avoidance rule
Given there are situations where the UK does not have taxing rights over an indirect disposal due to the taxing rights under a particular tax treaty, the government introduced an anti-forestalling rule to apply to certain arrangements that seek to exploit provisions in certain tax treaties.
The rule applies to arrangements entered into on or after 22 November 2017, where:
- The main purpose, or one of the main purposes, is to obtain a UK tax advantage for any person.
- The tax advantage is in relation to tax that person would (apart from the arrangements) have become liable as a result of the charge to tax on gains accruing to non-residents that will come into force on 1 April 2019 (for companies) and 6 April 2019 (for other persons). April 2019 will therefore be a rebasing point for widely-held (a widely-held company is one that is not close) non-resident companies on all disposals of UK property and for all persons on all indirect disposals.
- That advantage arises by reason of any provisions of double taxation arrangements, but only in a case where the tax advantage is contrary to the object and purpose of those provisions.
The new targeted anti-avoidance rule will apply to arrangements entered into on or after 22 November 2017 in a treaty shopping case, and arrangements entered into after 5 July 2018 in any other case.
Interaction with the annual tax on enveloped dwellings rules
A significant number of respondents to the consultation argued the annual tax on enveloped dwellings rules seemed unnecessary when this new measure comes into force. The government therefore intends to abolish the ATED-related CGT provisions.
Tony Wickenden is joint managing director of Technical Connection. You can find him Tweeting @tecconn