Non-Resident Property Taxation: Episode V – the Government Strikes Back

Background

The ownership of high value UK residential property by people resident outside of the UK has been a hot topic in the private client world for the last six or seven years. Through four rounds of legislative changes, the Government has eliminated the Inheritance Tax benefits of offshore property owning structures, eroded the Capital Gains Tax advantages of property ownership by non-residents and introduced a punitive rate of Stamp Duty Land Tax for companies wishing to purchase residential property. During the budget in October, the Chancellor also announced a proposal to charge an additional SDLT charge of between 1% and 3% on non-resident purchasers of residential properties.  Furthermore, with the introduction of the Annual Tax on Enveloped Dwellings, companies who own high value residential property through a company are potentially subject to an annual tax charge of up to £226,950.

The Government reported that in the 2016-2017 tax year the Annual Tax on Enveloped Dwellings alone generated £175 million of revenue,  against a predicted annual revenue of £35 million when the tax was introduced in 2013. Taxation of UK land, particularly where many of the taxpayers are not eligible to vote in the UK, is proving a popular political football to kick. To date, commercial property structures have been largely unaffected by rule changes. However, the Government is now turning its legislative attention to non-residential property.

The current position

The classic structure used by non-domiciled individuals wishing to own UK commercial property is to purchase the property through a non-UK company and either own those shares directly or through a non-UK trust. This mirrors the approach taken for many years to residential property. 

As the law stands, there are two main advantages to such a structure:

1. The individual is not treated as owning a UK asset for Inheritance Tax purposes (ie, there would be no tax on this asset on their death if they are not UK domiciled).
2. The property, or the shares in the company, could be sold without Capital Gains Tax being due from the seller or a Stamp Duty Land Tax charge being levied on the purchaser.

Proposed changes

The draft Finance Bill 2019 includes provisions that would remove the CGT advantages of such structures. The proposed changes would operate so that from 6 April 2019 a sale of the shares in a property owning company would trigger a Capital Gains Tax charge on the shareholder if those shares derive at least 75 per cent of their value from UK land (meaning both residential and non-residential). In addition, a sale of the property by the company would trigger a Corporation Tax charge. In short, it would no longer be possible to dispose of either the property or the shares without a UK tax charge potentially being triggered. These changes will also impact non-resident individuals who directly hold UK property in their own names. 

Some relief is provided as UK land will be “rebased” to 1 April 2019 (meaning that any increase in value before that date would not be liable to tax). However, given that this is three days after it is intended that the UK will leave the European Union, there are concerns among professionals that rebased values may actually be lower than current market values. 

What should you do?

If you are non-resident and directly or indirectly own interests in UK land, be it commercial or residential, you should speak to your usual contact at Mills & Reeve about how these proposed changes will impact you. There is a short window of opportunity during which any tax planning can be carried out and it is therefore essential that you act quickly.