Taxing UK property gains of non-residents

The clock is ticking for exemption tax regime to be agreed for funds...


The UK has one of the most complex tax codes in the world, clocking in at more than 10 million words. Earlier this month, draft legislation for capital gains tax for non-residents on UK property was published - adding at least another few thousand words to that total.


In a nutshell, the draft legislation was published following consultation to bring most gains realised by non-UK residents arising from disposals of both direct and indirect interests in UK property within the UK tax net.


From April 2019, gains on any UK property arising after this date, including commercial and residential property, will be chargeable to UK tax. In addition, gains arising to non-UK residents on the disposal of shares, which derive their value from UK property, will also be taxed where certain conditions are met. At the same time, Annual Tax on Enveloped Dwellings (ATED)-related capital gains tax will be abolished.


The primary winner from the new rules is HM Treasury, which has essentially acquired a new source of revenue. Those involved in direct or indirect property disposals will suffer a loss in the form of tax charges or lower values of their investments in property-holding vehicles.


Ultimately, the changes are aimed at putting the UK on a level playing field with the taxation treatment applied for property gains of non-residents by most other countries around the world. Importantly, it removes the competitive advantage that non-UK residents have over resident investors by virtue of their tax status.


Corporation Tax


One material area of uncertainty remains. When the proposals were first put forward, it was the stated intention that tax-exempt investors, such as pension funds and sovereign wealth funds, should not be disadvantaged by the new rules.


However, achieving this intention has been difficult, particularly due to the fact that many tax-exempt investors hold their interests in UK property through investment fund structures. Consultation will, therefore, continue to determine a special regime for widely-held funds to be brought in at the same time as the legislation takes effect in April 2019.


This leaves very little time for this is to be achieved. The absence of an effective exemption would equalise the position with UK pension funds that invest in property through UK corporates and which do not benefit from an exemption from tax where it is suffered by the corporate entity.


What is currently proposed is an election whereby a widely held offshore fund will ‘elect’ to be exempt from tax on disposals of property to the extent that it is held by tax-exempt investors. The non-tax exempt investors would then be taxable on their share of any gain on a disposal of their investments.


Even if such an exemption can be achieved, it is likely to be complex with investors looking to UK REITs as an alternative structure for investment.


There are still many unknowns but what is clear is that, as we strive for a more fair, transparent and simple tax system, there’ll be winners and losers along the way. With just nine months before the new rules come into force, the clock is already ticking for non-residents to fully understand the financial and commercial impact the legislation will have.