From April 2019, non-UK residents will be subject to UK tax on gains arising from direct or indirect disposals of all types of UK land & real estate, and interests in UK property holding entities. This is a topic that will impact all foreign investors in UK property, including real estate funds.
Historically, the UK never levied capital gains tax on non-UK residents. In fact, the UK was one of the only countries in Europe not to tax non-residents on gains derived from real estate. This made the UK real estate market very attractive to foreign investors, and is likely a contributing factor behind the significant rise in house prices over the last 20+ years (particularly in London).
Since April 2015, rules were introduced to charge capital gains tax to non-UK residents, but were limited only to UK residential property (and not commercial property).
The UK Government has now expanded the charge to UK capital gains tax to apply to all capital gains arising on disposals made on or after 6 April 2019 of:
- Interests in UK land & real estate; and
- Interests in entities deriving at least 75% of their value from UK land & real estate (i.e. ‘UK property rich’ entities), where the investor has a 25% or more interest in the property rich entity. However, the 25% de minimis does not apply in the case of interests in UK property rich collective investment vehicles (CIVs).
The applicable capital gains tax rate varies depending on the circumstances of the investor, e.g:
- 19% for non-resident companies (17% from April 2020),
- Either 10%, 18%, 20% or 28% for non-resident individuals (depending on the total amount of income/gains and the type of property, but irrespective of the holding period), and
- Either 20% or 28% for non-resident trusts.
Where a non-UK resident investor disposes of a taxable asset, they must:
- report the disposal to HMRC by filing a Corporation Tax Return (for corporate entities) or non-resident capital gains tax return (for individuals), and
- make a payment on account of the capital gains tax due (if any) (the UK capital gains tax is not withheld at source).
Tight reporting and payment deadlines apply (e.g. 30 days from disposal in the case of individuals). Reporting is also mandatory, even if the disposal was made at a loss or if no tax payment is due. Penalties apply for late reporting or failure to report.
Only gains in respect of the increase in value after 6 April 2019 are subject to UK tax. Therefore, there is a rebasing of the asset’s value according to market value on that date (investors should consider obtaining a formal valuation if they wish to be able to rely on such value for the calculation of future gains). It is however possible to elect for historical cost to be used when calculating gains, where this is greater than the April 2019 valuation.
Interaction with tax treaties
UK double tax treaties typically grant the UK taxing rights over the direct disposal of UK property. However, not all double tax treaties allow the UK taxing rights over gains made by non-resident investors indirectly from the disposal of shares in UK property rich entities (notably the UK-Luxembourg treaty). It is understood that all such treaties are currently being re-negotiated, and anti-avoidance rules have been introduced in the meantime to prevent investors from restructuring their affairs to obtain a tax advantage from a more favourable treaty.
There are various exemptions to the UK capital gains tax charge, including (i) for properties used as part of an active trade, and (ii) disposals made by certain qualifying investors (such as foreign pension funds, sovereign wealth funds and charities if certain conditions are met).
Collective Investment Schemes (CIVs)
CIVs which do not meet the criteria to qualify for the above-mentioned exemptions will be within scope of the UK capital gains tax charge, if they are ‘UK property rich’ (i.e. derive more than 75% of their value from UK property at the date of disposal).
However, HMRC has introduced a specific sub-set of rules dealing with the treatment of such CIVs, the principle of which is broadly to exempt gains on disposals made by CIVs (including any underlying holding vehicles), but to tax the investors when they receive value from the CIV (i.e. upon receipt of a subsequent dividend distribution, or upon disposal of their holdings in the CIV). In this respect, there are two elections that can be made by CIVs: a transparency election and an exemption election. For further details on the application of these rules to CIVs, please click here.
CIVs which make one of these elections will be required to report details to HMRC on an annual basis of (i) all their UK property disposals, and (ii) details of their investors (names, addresses, etc.). The CIV will also be required to notify the investors within 30 days of disposal of the investor’s obligation to report to HMRC using the appropriate tax return, and pay any UK capital gains tax liability.
Managers of funds investing significantly in UK property should ensure they are familiar with the rules and their compliance obligations, as well as ensure they understand the impact on the fund and the investors.
Clients of Swiss financial institutions who own UK property should now be aware that they will be subject to UK capital gains tax on any gains upon disposal arising after April 2019, even if they are non-UK resident. This tax charge should be taken into account by clients when making their investment/disposal decisions. Relationship Managers should also be aware of this, so they can ensure that clients are properly informed when considering UK real estate investments.
Swiss financial institutions should also be aware that investors in ‘UK property rich’ CIVs may have an obligation to report and pay UK capital gains tax upon the receipt of dividends and/or disposal of their interests in the CIV. This is unlikely to affect many CIVs available on the market in Switzerland due to the 75% threshold, nevertheless care would be advisable before investing in any CIV which holds a considerable proportion of UK property (since the 75% threshold is only determined at the date of disposal, and is also considered separately for each holding vehicle within a CIV structure).