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UK Commercial Property held offshore in HMRC’s sights

24/11/2017 | Philip Alfandary

This year’s autumn budget brings unwelcome news for foreign investors in UK commercial property.

With effect from April 2019, capital gains realized by non-residents from disposals of UK commercial property will fall within the UK tax net. This will apply to such gains made by both companies and individuals.

What’s the present position?

Only where a non-resident carries on a trade in the UK through a permanent establishment here will a disposal of UK commercial property attract UK tax on any gain arising (and only then when it is used for that trade).

Otherwise, only gains arising on the disposal of UK residential property held by non-residents can fall into charge to UK tax.

The rate of tax depends on whether the non-resident disposing of the property is a company -in which case the rate is the corporation tax rate, 19% – or an individual – in which case capital gains tax rates apply. To complicate matters, where the residential property is a higher value one and is owned by a company, an alternative rate of 28% can apply.

The changes in detail

Non-UK residents will be brought within the scope of UK corporation tax or capital gains tax (CGT) on gains arising on the disposal of UK commercial property.

  • Additionally, the new regime will apply to ‘indirect disposals’ as well.  This means that where a non-resident company (or other entity) is ‘property rich’-broadly, where 75% or more of its gross asset value is represented by UK immovable property – a sale of an interest in that company can trigger a charge on the non-resident holding the interest.  The charge will apply where the non-resident  holds a 25% or greater interest in the company, or has held such an interest in the past five years.
  • There will be an obligation on certain advisors who have sufficient knowledge of such indirect disposals to report them within 60 days, unless they are reasonably satisfied that the non-resident has reported already.
  • There will be an obligation on certain advisors who have sufficient knowledge of such indirect disposals to report them within 60 days, unless they are reasonably satisfied that the non-resident has reported already.
  • Historic growth in value in such properties up to the point the charge comes into force will be not be taxed. The value of interests in commercial properties will be rebased to April 2019 for the purposes of working out what gain the tax will apply to.

Comment

The proposals represent a significant change in taxing chargeable gains on immovable property, and will create a single regime for disposals of interests in both residential and commercial property.

Commercial property is widely held through offshore vehicles, and this measure will mean that future increases in value from 2019 will become taxable (on a disposal). This will obviously have an impact on how some multinationals hold property. While there will be specific exemptions for certain types of investors, it is likely that existing tax exempt vehicles such as Real Estate Investment Trusts, which are government approved creations of statute, may become more attractive.

© Rosenblatt Solicitors 2017
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