New tax charge on commercial property gains

Just as non-resident investors were getting used to being taxed on residential property gains the UK Government used the recent Budget to drop the bombshell that from 1 April 2019 (companies), or 6 April 2019 (others), commercial property gains will be caught by a new tax charge as well as well.

This was unexpected as the hope was that the Government would keep the exemption for commercial property to continue to attract overseas investors into capital investment in support of UK business. However, it seems that this has been trumped by the 'level playing field' card. In other words, going forward, overseas investors and UK investors will be taxed in the same way.     
This has a number of implications for the real estate, hotel and property based sectors where overseas investors almost invariably acquire buildings using a non-UK company in a jurisdiction such as Jersey, Guernsey or the Isle of Man in order to take advantage of favourable tax rules.

The new rules have not yet been finalised but are likely to include the following.
  • All non-resident investors will be subject to tax on gains from commercial property disposals, from April 2019.
  • The tax charge will not just apply to properties held direct. Disposals of interests in certain “property rich” entities such as property investment companies or partnerships will also be caught.
  • For assets currently held, only gains accruing after April 2019 will be taxed. This will be  achieved by a “rebasing” for tax purposes at either 1 or 6 April 2019.
  • For some cases there will be a requirement to report disposals within 30 days.
  • Many companies who are not currently registered for corporation tax will now need to register, just to report the disposal.   
  • To help ensure compliance, in addition to the normal penalties, the Government also intends to impose an obligation on UK advisors on the transaction, who may also need to report.
  • Tax advantages enjoyed by collective investment vehicles such as Real Estate Investment Trusts will continue. However, the playing field will be levelled by taxing non-resident investors in a similar way to UK resident investors i.e. no tax on gains within the fund, but  disposals by offshore investors of interests in the fund may now for the first time fall into charge.   
Overseas investors will need to study the proposals in detail to identify how the changes will affect their current investment/business structure and, indeed, whether it can now be simplified.

Whilst yet to be confirmed, it seems likely that the final rules will be based firmly on the principles outlined above. This, combined with another proposal to bring the net rental income of non-resident property companies out of income tax and into the corporation tax regime from 1 April 2020, means that all offshore property investors should review their current structures over the next few months.

To find out more, please contact Vincent Wood.

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