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Budget update: UK commercial property

Budget update: UK commercial property

Thanks to the Chancellor, the UK is about to become a little less attractive to overseas property investors. The recent UK Budget announcement included plans to ensure that non-resident investors in UK commercial property will, from April 2019, pay UK capital gains tax or corporation tax on gains. Although this is labelled as a consultation, it is very clearly stated that the strategic decision to extend the scope of UK property taxation has been made and the consultation is simply about the details of its implementation.

The measures announced also extend the scope of the existing Non-Resident Capital Gains Tax (NR CGT) regime for UK residential property. That regime is extended beyond closely held companies, trusts and individuals to include diversely held investors, meaning that institutional investors and investment funds as well as non-close companies will now be liable to the NR CGT charge.

Disposals of “envelopes”

Another new measure that will apply from April 2019 to both commercial and residential property will ensure that gains on disposals of interests in entities that are “property rich” will be chargeable to UK tax. For these purposes, an entity that is “property rich” is defined as deriving 75% or more of its value from UK land. The 75% test will be based on the gross asset value of the entity and, unhelpfully, will ignore debt.

There is an additional test to determine whether a disposal of a property rich entity has taken place. This test requires that the non-resident owner of the interest in the entity or parties related to them must hold at least a 25% interest in the entity being disposed of or have held such an interest at any time in the 5 years ending on the disposal date. Additionally, the interests of related parties will be aggregated in the 5 years ending with the disposal to determine whether the 25% test has been met.

Funds and life assurance

The 25% test has been introduced to prevent small investors being liable to UK taxes on disposals of interests in investment vehicles in relation to which they have little knowledge or control over investment strategy. However, non-UK resident investors in UK Collective Investment Schemes will be liable for NR CGT if the fund meets the 75% test and the non-resident investor meets the 25% test. It seems unlikely there will be many instances where a non-UK resident investor will find they are liable to NR CGT as an investor in a UK fund.

The situation is different for non-UK funds, as the fund itself will be liable to NR CGT if it holds UK property directly or, more commonly, via a special purpose overseas company and disposes either of the property itself or of its interests in the special purpose company, provided in the case of the latter that the property rich test is met and also the 25% test.

Additionally, the existing exemption for life assurance companies from the existing NR CGT regime is being withdrawn from April 2019; this is likely to be seen by HMRC as closing down any possibility of structuring UK real estate investments through life bonds by private investors to avoid NR CGT.


As with NR CGT for residential property, there will be rebasing to the start of the regime. This will be straightforward where UK property interests are directly owned but it is likely to be complex where the interests are indirect and are held as shares in unlisted companies and private funds. Interestingly, rebasing for the new charges will either be on the April 2019 value or the original acquisition cost of the property. Unlike the existing NR CGT regime for residential property, there will not be an option to time apportion the gain in a straight line over the full ownership period pre and post April 2019. Also, the base cost for indirect interests will be determined solely by the value at April 2019.

Compliance issues

As is now the custom, there is an anti-forestalling rule. This applies to counteract the effect of any arrangements entered into from 22 November 2017 onwards to obtain an advantage in relation to the new provisions where those arrangements involve double taxation agreements. In plain English, this means that using treaty protection that restricts taxing rights over, for example, the disposal of shares in a non-UK company, to the home jurisdiction of that company won’t be allowed. However, if as at 22 November 2017 the company in question already meets the property rich test, the 25% test is also met, and the company is in a jurisdiction where gains are treaty-protected, it would seem anti-forestalling would not apply as no arrangements will have been entered into to create an advantage in relation to the new regime.

HMRC has recognised there will be challenges to ensure that non-UK residents comply with the new regime. The reporting regime for non-corporate investors will mirror the existing requirement under the NR CGT regime for residential property to file a return within 30 days of completing the transaction. Companies will have to register for UK corporation tax at the time of the disposal but the normal corporation tax time limits for filing and payment will apply. However, an additional reporting requirement is proposed for indirect disposals by non-UK residents. Broadly, an acting UK adviser (the type of adviser is not specified) who is aware of the transaction and cannot be certain that the transaction has been reported to HMRC will have the obligation to report the transaction to HMRC within 60 days.

Finally, the consultation document makes no mention of interests in UK commercial property becoming “relevant property” for UK inheritance tax purposes, as was the case with UK residential property interests with effect from 6 April 2017. If that remains the case, non-UK domiciled investors may still wish to hold UK commercial property through offshore entities for IHT purposes.

Non-resident investors are now faced with some difficult choices to make between now and April 2019 and we, and more pertinently, the UK property industry, await developments with interest.

If you would like to discuss any of the above, please contact us.