Since 6 April 2015, non-residents holding UK residential property have been within the scope of UK capital gains tax (CGT). Without much warning, in the Autumn Budget 2017, a tax policy of more than 50 years designed to encourage overseas investment into UK real estate was reversed. From April 2019, CGT will apply to non-residents disposing of all types of UK real estate which will include commercial property. The new rules in the UK will create a single regime for the disposal of both residential and commercial property and removes the current CGT exemption for commercial property. This change brings the UK in line with almost all developed countries who levy tax on the disposal of commercial property situated in their jurisdiction and brings UK and non-UK investors at a level playing field.
The new rules are currently undergoing consultation and much of the scope and detail is unknown. However, it has been confirmed the new rules will come into place from April 2019. Only gains accruing from April 2019 will be within the charge to CGT with historical gains excluded. Therefore, non-resident companies holding UK commercial property will be within the scope of CGT for any disposals made after April 2019. Residential property held by non-residents are already within the scope of non-resident CGT.
Disposals of directly held commercial property as well as a disposal of a 25% interest in a property rich entity i.e. a non-resident company that derives directly or indirectly 75% or more of its gross asset value form UK property will be within the charge to CGT. There are exemptions for overseas pension fund and other qualifying institutional investors.
Crucially, it seems that the shares of non-resident companies deriving value from UK commercial property remain non-UK situs and therefore outside the scope of UK inheritance tax (IHT). This does not apply to directly held commercial property which remain within the scope of IHT.
Using onshore structures
Given the introduction of CGT on commercial property for non-resident, it would seem that onshore structures such as UK companies will look attractive for non-resident investors especially in relation to cost savings for using onshore structures. However, the benefit of holding UK commercial property by non-resident companies remains due to the IHT benefit. Having said that, it is likely only a matter of time before commercial properties held in offshore structures will come within the scope of UK IHT – the writing is on the wall!
Corporation Tax Regime
It has also been proposed that non-resident companies will be within the scope of the UK corporation tax regime from April 2020. This means that non-resident companies will be chargeable to corporation tax rather than income tax. From April 2020, the UK corporation tax rate is proposed to reduce to 17% (currently 19%) whereas the income tax rate for non-resident companies is 20%.
There may be restructuring and planning that non-resident investors may want to consider now, however, we suggest this is awaited until the consultation has ended and the legislation published and there is clarity as to how the rules will operate. It is worth bearing in mind the following: • The IHT benefit of holding UK commercial property through non-resident structures currently clearly outweighs the cost saving of using onshore structures. • Only capital gains accruing post 5 April 2019 will come into the CGT charge. • Any restructuring should take into account Stamp Duty Land Tax (SDLT) implications as SDLT costs can be heavy. Non-resident owners of commercial property may also be considering planning for the future and transfer their investments possible to UK resident children. Any planning/restructuring must be looked at a case by case basis.