With a few notable exceptions for retail and institutional investors, non-UK resident residents who dispose of UK residential property interests are subject to non-resident UK capital gains tax on the growth in value of the property from April 2015 onwards.
From 6th April 2019, this regime is being extended beyond residential property, so that overseas investors will also need to ensure that tax is paid on;
- Gains on disposing of UK commercial property and undeveloped land
- Gains on “indirect disposals” of UK real estate interests in both residential and commercial property and undeveloped land, for example a disposal of shares in a non-UK resident subsidiary company whose main asset is UK real estate.
Rebasing
In all these cases, the asset will be rebased at 5th April 2019. This means that overseas investors who own companies holding UK residential property may need to obtain a valuation of the property, even where they expect the disposal to be structured as a disposal of the shares rather than the property itself.
Investors who own UK property directly or indirectly may therefore want to obtain professional valuations at this date to minimise the scope for valuation disputes with HMRC many years later, following a disposal. The Brexit deadline of 29th March 2019 may of course have a significant impact on UK property valuations at this time, increasing the risk of valuation disputes.
Selling a company
In recent years, UK residential property prices have been depressed by both Brexit and the increases in Stamp Duty Land Tax. Where a UK residential property is held in a non-UK company, this would still offer an SDLT saving to a potential purchaser, and it may mean that it’s worth investors looking at whether the company can be sold before or shortly after April 2019 to maximise the proceeds after payment of non-resident capital gains tax.
However, purchasers are often wary of acquiring a company instead of the property directly and there are two common reasons for this. Firstly, a prospective purchaser of a company will be concerned about the history of the company and is likely to require due diligence that would not be required for a property acquisition. Secondly, in addition to the normal checks for potential claims and creditors of the company, the purchaser will also be advised to check potential tax liabilities of the company, hence the due diligence would include the tax residence status of the company, payment of UK income tax on any rental income to date, and the filing of ATED returns.
Property used by a beneficiary of a trust
The extension of non-resident capital gains tax to share disposals will apply to shares that derive 75% or more of their value from interests in UK real estate. There have been many changes to the taxation of UK property in recent years, including bringing UK residential property within the scope of UK inheritance tax.
Trustees may have re-evaluated whether UK residential property is still preferred as an investment, and decided to continue to hold UK residential property via a company. However, this should be reconsidered in the light of these changes, particularly where residential property is used by the beneficiaries. Here, it may be appropriate to consider distributing the shares before 6th April 2019.
Key actions
In our view, the key actions for overseas investors to consider in the six months before 6th April 2019 are as follows;
- Consider whether investments in UK property are still the preferred option in each case, particularly for trustees; if disposals are to be made, there are advantages in making them before 6th April 2019.
- Consider whether a better price could be obtained for UK property held in a company if sold before 6th April 2019. Ask a tax expert to check the tax position of the company in advance to minimise practical obstacles to completing a sale in time.
- Make arrangements to obtain a valuation of non-residential UK real estate as at April 2019, including valuations of shares in companies that derive at least 75% of their value from UK real estate interests.
If you would like to plan ahead for the changes in non-resident capital gains tax, please contact us.