Investing in land and property: the ever-changing UK tax landscape
Some UK tax rules are set in stone while others regularly change and evolve; the tax rules for non-residents owning UK property are a case in point. The result is a complex web of overlapping provisions covering a range of taxes.
The most recent change is the introduction, from 6 April 2019, of non-resident capital gains tax (NRCGT) for all UK land and property, including property held through offshore structures and sales of shares where the company concerned is ‘property rich’.
A refresher: UK residential property
NRCGT has applied to gains arising on the disposal of UK residential property by non-UK resident individuals, trusts and companies since April 2015, and the broad position is that any gain arising on the sale of a property after that time is subject to capital gains tax (CGT). To ensure that the legislation does not have retroactive effect, the calculation reflects either a pro-rated proportion of the total gain realised or a deemed acquisition cost based on an April 2015 market value of the asset.
The ownership of residential property by non-UK structures is also affected by higher Stamp Duty Land Tax (SDLT) rates on purchase, ATED (the Annual Tax on Enveloped Dwellings – a charge on properties held within companies), and from April 2017 inheritance tax (IHT) on UK residential property held indirectly through non-UK companies.
This raft of legislation means that holding UK residential property through an offshore structure is no longer attractive from a UK tax perspective, although there may be other reasons for such structuring. Care must be taken before unwinding structures, as the tax cost of extracting residential properties from existing structures can be high.
Commercial property and land
In contrast to the position with regard to UK residential property, purchasing commercial property and land through a non-UK company can still offer protection from IHT in appropriate cases. In particular, non-UK domiciled investors intending to acquire UK farmland and commercial property may wish to consider doing so through an overseas company. For IHT purposes they will be treated as owning a foreign asset (shares in the company), even though the only or main asset of the company is UK land.
However, in April 2019 capital gains arising on disposals of non-residential UK land and property were brought within the charge to NRCGT. As with residential property gains, the tax charge is not retroactive, and is based on a pro-rated gain or calculated with reference to the April 2019 market value of the asset.
The changes enacted in April 2019 cast their net wide. In addition to direct disposals of UK land and property, the legislation also catches indirect sales of UK land in the form of disposals of shares in a ‘property rich entity’ in which a ‘substantial interest’ is held.
- Property rich entity
Broadly, this is any company which derives more than 75% of its gross asset value from UK property, whether residential or commercial. The definition is not restricted to closely controlled companies.
- Substantial interest
Broadly, a substantial interest will exist where, within the period of two years preceding the disposal, the vendor had an interest of 25% or more in the company, including any participation held through intermediate entities such as partnerships. In determining whether the threshold has been reached, account must be taken of not only the number of shares held but also voting rights, income available for distribution and entitlement to assets on a winding up.
There is a limited exemption from NRCGT where the UK land is used in a qualifying trade of the property rich entity, and the trade is also being sold. In order to qualify for the exemption, at least 90% of the value of the land must be used in the qualifying trade, or have been acquired for future use in it, and the trade itself must have been operational for at least one year (and be expected to continue post sale). Commercial letting is not regarded as a trade for these purposes.
Double taxation agreements
In cases where a transaction is subject to the taxation rules of more than one jurisdiction, the terms of any applicable double taxation agreement will need to be considered. For example, a disposal could fall within the NRCGT regime, but the relevant double taxation agreement may give primary taxing rights to the country in which the shareholder is resident, subject to the possible application of anti-avoidance rules designed to prevent ‘treaty shopping’.
Transactions in land
There is long-standing anti-avoidance legislation which charges to income tax certain gains of a capital nature arising from the disposal of UK land. The rules are complex, but in essence they are designed to catch transactions that include a speculative element, or where the land concerned was not originally acquired primarily for its investment potential. They apply equally to residents and non-residents, and to both direct gains and those realised indirectly (for example the sale of shares in a property-owning company).
A summary of property tax changes
- Disposals of UK residential property by non-UK tax residents are within the NRCGT regime from April 2015.
- Disposals of all other UK land and property by non-UK tax residents are within the NRCGT regime from April 2019.
- Gains on both UK land held directly and that held indirectly through a ‘property rich’ entity are now subject to tax.
- Relief may be available for sales of shares in property rich trading companies, or under the terms of an applicable double taxation agreement. Depending on the specific facts of the case, certain land transactions may be subject to income tax rather than CGT.
- Given the complexity of the tax regime applying to UK land, it is always advisable to seek professional advice prior to a disposal.