When announcing the Autumn Budget in 2017, the Chancellor made clear his plans to include capital gains made by non-residents when selling UK property within the bounds of UK tax. The reason for this is to ensure that there is one single system for the sale of both commercial and residential property, minimising the desire for people to hold UK property within offshore arrangements that include low or no tax charges.
Capital Gains Tax and the Imminent Changes
Currently, any non-UK residents selling their UK property are not subject to Capital Gains Tax, unless the property is a residential property whereby a specific capital gains system applies. Although most income from UK property is subject to the UK tax system, overseas investors have been benefiting from the non-resident capital gains tax regime, making the UK a very attractive place to invest over recent years.
The changes are set to come into effect in April 2019, and will see changes at investor level and fund level, with a big impact to fund structuring very likely. As suggested by the Chancellor, all gains on property and indirect holdings of such property will be taxed as of April 2019, despite the residence of the party selling the property.
The Impact Investors may Experience
The changes that have been put forward are almost certainly going to have a big impact upon investors, particularly where indirect sales are concerned. As part of the new rules, capital gains from indirect disposal of residential and commercial property sales with the property is being held within an entity (where immovable property accounts for at least 75% of gross asset value) will be targeted. However, such rules are only set to apply to those non-UK residents that have or have previously in the last 5 years had at least a 25% interest in the entity.
Although this means that particular tax systems for certain funds may not experience any change at all and remaining untouched by tax, the sale of interests in relevant funds by non-UK residents may well be charged a rate for UK Capital Gains Tax.
The Impact on Specific Funds
For any funds that are protected against gains tax solely due to being non-UK resident will now be brought into tax charges, applying to funds such as the Jersey Property Unit Trust and funds with similar structures. It has also been highlighted recently by HMRC that current funds, such as Exempt Unauthorised Unit Trusts (EUUTs), Property Authorised Investment Funds (PAIFs), Real Estate Investment Trusts (REITs) and Authorised Unit Trusts (AUTs), will continue with arrangements already put into place. This could well see these particular funds become more popular in the future, although there will be stricter criteria and more extensive checks carried out for individual cases.
Author Bio
Gower Accountants are specialist chartered accountants in Leicester, with a wide range of services including bookkeeping, statutory account preparation, tax planning and more.
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Daniel Peacock