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Taxing gains made by non-UK residents on UK immovable property - an update

The Government has already confirmed that, from April 2019, non-UK residents will be subject to capital gains tax on disposals of all UK property. Further details were promised around the tax treatment of Collective Investment Vehicles – this has now been published.

Currently non-UK residents are only taxable on disposals of UK residential property. Only those persons who are currently not liable to UK tax on capital gains, for reasons other than being non-UK resident, would be outside of the charge.

As promised, the Government has now published further details around a set of special rules that attempt to address both of the following issues in relation to real estate investments:

  1. The impact on exempt investors in offshore funds, such as pension schemes, where the rules as proposed could cause them to be taxed at the level of subsidiary holdings; and
  2. The potential for economic double taxation, due amongst other things to the indirect disposal rules, when disposals are made at a lower tier of a fund structure and the proceeds passed up to investors.

This latest publication is lengthy and detailed, and mainly covers the rules for collective investment vehicles. Please see here for full details. However, it does provide some further information about the tax position for investors:

  • Non-UK resident collective investment vehicles that are UK property rich (see below) will be treated as companies, and interests in them as shares. Any disposal by a non-UK resident investor will be chargeable as a disposal of an interest in a UK property rich company.
  • Non-UK resident investors in collective investment vehicles that are UK property rich will be considered to have a substantial indirect interest in UK land, so will be chargeable on gains on disposals of an interest in a UK property rich collective investment vehicle regardless of their level of investment in the collective investment vehicle – they will not benefit from the 25% ownership exemption (see below). This will be the case for investment in both non-UK collective investment vehicles, and UK resident collective investment vehicles such as UK REITs and Property Authorised Investment Funds.
  • Non-UK resident investors in a company that is not a collective investment vehicle, but that derives at least half of its market value from one or more collective investment vehicles (so that that entity cannot be UK property rich without reference to those collective investment vehicles) will also be considered to have a substantial indirect interest in UK land and will therefore not benefit from the 25% ownership exemption.
  • Collective investment vehicles, and companies that are UK property rich and at least 50% invested in one or more collective investment vehicles, are also considered to have a substantial indirect interest in UK land when disposing of a UK property rich company.
  • Non-UK resident investors will not be considered to have a substantial indirect interest in UK land (see below) where they are investing in a collective investment vehicle that meets a Genuine Diversity of Ownership condition, or is not a close company*, where that collective investment vehicle is being marketed with a policy of not investing more than 40% in UK land. Even if a disposal is of a UK property rich company (due to circumstances at a given time), the investors will not be considered to have a substantial indirect interest in UK land.

*This is similar to the normal close company test of being controlled by five or fewer participators. However, for this purpose, a look-through of immediate investors is allowed to establish whether control is ultimately established through institutional investors. The look-through must be through bodies corporate.

The default treatment of non-UK resident collective investment vehicles will be that they are companies for these purposes, so will be chargeable to corporation tax on their gains. Eligible non-UK resident collective investment vehicles that commit to report certain information annually to HMRC can make an election that provides exemption from tax on gains for the collective investment vehicle itself and for entities in which it has at least a 40% investment. The collective investment vehicle must be UK property rich. In summary, the exemption is available as follows:

  • Available to collective investment schemes and companies that are equivalent to UK Real Estate Investment Trusts;
  • The collective investment vehicle or company it 99%+ owns must remain UK property rich;
  • The collective investment vehicle, and in some cases company, must meet the qualifying conditions;
  • The investors may be tax resident anywhere;
  • The collective investment vehicle must be non-UK resident, unless it is a partnership or a Co-ownership Authorised Contractual Scheme;
  • Entities in the structure may be tax resident anywhere.

This election is likely to be used mainly by widely held funds with large structures and, particularly where the investors are exempt, such as pension schemes, and wish to prevent tax charges in the fund itself that will impact on their returns.

Regardless of whether the collective investment vehicle is within the exemption regime or not, the investors remain taxable under first principles on any disposal of an interest in a collective investment vehicle that is a UK property rich entity.

Non-UK resident, UK property rich collective investment vehicles that are transparent for income will be able to elect to be treated as transparent for gains. Once made, the election cannot be withdrawn. Under the election, the collective investment vehicle will be treated as a partnership for these purposes, so that the investors will be treated as if they directly held an interest in the underlying assets of the fund. The transparent treatment will apply for all investors in the fund, both UK and non-UK resident.

The April 2019 changes in brief

All non-UK resident persons' gains on direct disposals of UK land will be chargeable. The rate of tax will be the same as for UK residents (eg. the normal CGT rates will apply to individuals and the corporation tax rate will apply to companies).

Indirect disposals of UK land by non-UK residents will also be chargeable. This applies when a non-UK resident investor disposes of an interest in 'property rich' entities (such as companies, partnerships and property unit trusts) and at the date of disposal, or at any point in the two years prior to that date, the non-UK resident holds, or has held, a 25% or greater interest in the entity.

A 'property rich' entity is one that derives 75% or more of its gross asset value from UK property. However, a trading exemption applies, to avoid real-estate rich trades, such as retail and hotel chains and utility companies, falling within the scope of a property rich entity.

Removal of 25% ownership exemption:

  • Covers Collective Investment Schemes, Alternative Investment Funds, UK REITs, and companies broadly equivalent to UK REITs
  • The disposal is of a UK property rich company and is connected to collective investment
  • The investor is non-UK resident
  • The collective investment vehicle may be tax resident anywhere.
  • Funds, other than partnerships, will be treated for the purposes of capital gains as if they were companies and so chargeable to corporation tax.

An investment in such a fund will be treated as if the interests of the investors were shares in a company, so that where the fund is UK property rich, a disposal of an interest in it by a non-UK resident investor will be chargeable to UK tax under these new provisions.

Where a UK Real Estate Investment Trust is UK property rich, its gains on disposals of UK property rich entities will be exempted under the same mechanism as disposals of property under the existing legislation.

How will tax be collected?

Currently, for non-UK residents (including UK residents that make disposals in the overseas part of a split tax year), when a return reporting a disposal of a UK residential property must be made to HMRC, the return and payment is already due within 30 days of the disposal being completed. This will be extended to apply to direct and indirect disposals of all UK land made on or after 6 April 2019 (whether or not a gain arises).

It appears that there could be a mechanism for the withholding of amounts on account of capital gains tax by collective investment vehicles. The new Finance Bill allows for regulations to be made to make provision for:

managers of collective investment vehicles to elect to meet the liability to capital gains tax or corporation tax in respect of indirect disposals of UK land made by any participant in the vehicle;
a simplified calculation of the tax liability of the participant in respect of those disposals;
authorisation for the manager of a collective investment vehicle (or anyone else of a description specified in the regulations) to deduct an amount on account of capital gains tax from amounts that would otherwise be receivable by the participant;

the times at which amounts deducted on account of capital gains tax are to be paid to HMRC, and the extent to which those payments meet the liability of the participant to capital gains tax or corporation tax in respect of any indirect disposal of UK land.

Please note that this document was prepared by a third party and as such Brewin Dolphin is not responsible for the content or able to answer queries on the topics dealt with. While we believe it to be correct at the time of writing, Brewin Dolphin is not a tax adviser and tax law is subject to frequent change. Therefore you should not rely on this information without seeking professional advice from a qualified tax adviser, who should also be able to assist you with any questions on the content.

This document was prepared as a general guide only and does not constitute tax or legal advice.

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