Capital Gains Tax –removal of exemption for non residents holding UK real estate from 6 April 2019

The Government announced in its Autumn budget last November that it was proposing to remove a unique benefit in relation to the rest of Europe and the US by applying capital gains tax (“CGT”) to non residents’ gains in UK commercial property.

CGT was extended to certain non-residents holding UK residential property in 2015 but now the beneficial treatment for commercial property is to also go.

On 6 July 2018 the Government published its response to the consultation along with draft legislation but noted that further technical consultation will be needed to address certain areas, for example overseas funds, but this will not delay the start date of 6 April 2019 for the new rules.

The rules will apply to gains arising from 6 April 2019 onwards and non residents will be charged on:

(i)    gains from direct disposals of UK property, and
(ii)   gains from disposals of interests in “property rich” entities, i.e. indirect disposals.

A “property rich entity” is an entity where 75% or more of the gross asset value derives from UK property and the non resident has held a 25% or greater interest in the entity at any point in the 2 years ending on the date of disposal.  Note this 25% exemption will not be available for collective investment vehicles investing in UK property, with the definition to be decided in further consultation.

It will also be possible to rebase property values to April 2019, i.e. there will be an option to calculate the gain or loss on a disposal using the original acquisition cost of the asset or using the value of the asset as at 6 April 2019. Both options will be available for direct and indirect disposal.  Note that where the original cost basis is used to calculate an indirect disposal and this results in a loss it will not be an allowable loss.

Land involved in a trading business will however be excluded from the new CGT rules.

It should also be noted that non resident entities that are currently outside the scope of CGT of UK residential property gains, e.g. by virtue of being widely held, will now be subject to CGT on their gains under this new regime.

Additionally overseas corporate landlords will be subject to corporation tax on their UK property income from 6 April 2020, including where they invest through a tax transparent collective investment vehicle.

For more information about the response to the consultation, the draft legislation and exemptions please contact Linda Fletcher.