Commercial property & non-residents – significant change

A significant change to the taxation on non-residents

owning commercial property is to be introduced from April 2019.

The rules follow the change in legislation for UK residential property that come into force in April 2015. They have now extended this to commercial property and so all UK commercial property held through non-resident individuals, offshore companies and trusts will be within the scope of UK Capital Gains Tax (CGT).

How is it calculated

Only increases in value arising after April 2019 will be subject to tax, so historic gains will be protected and investors that have held assets since before this date will only be subject to tax on a disposal to the extent their asset has increased in value since April 2019.

Non-resident companies and unit trusts will be taxed at the corporation tax rate (currently 19 per cent) while individuals and other entities will be taxed at capital gains tax rates (currently 20 per cent for higher and additional rate taxpayers).

Who is caught?

The new regime applies when there is a direct disposal of UK commercial property. However, it will also include indirect disposals (for example where a non-resident holds a property through a company, and the shares, rather than the underlying property, are sold).

For an indirect disposal to be taxable, the following two conditions must be met at the date of disposal:

1. The entity being disposed of must be ‘property rich’; and
2. The non-resident must hold a 25% or greater interest in the entity, or have done so within the five years ending on the date of disposal.

Property rich test
This will apply where, at the time of disposal, 75% or more of the value of the asset disposed of derives from UK property. The test will be based on the gross asset value of the entity, i.e. without relief for any mortgage or other interest costs – and will use the market value of the asset(s) at the date of disposal.

The ownership test
This test will look at the interest which a non-resident, together with related parties, has held in a property rich entity at the date of disposal, or at any point during the previous five years.

Impact of double tax treaties

It is important to take account of any relevant double tax treaties when considering the new rules. The taxing rights will generally sit with the UK as the country where the property is situated, but the position is more complex for indirect disposals. To reflect this, anti-forestalling provisions took effect from 22 November 2017 which prevent holdings from being restructured so as to avoid the charge.

ATED – related CGT

The government intends to structure the new rules so that as far as possible one regime applies for all disposals of interests in UK immovable property by non-residents. The Government is, therefore, considering harmonising the Annual Tax on Enveloped Dwellings (ATED)-related CGT regime with the new rules.

If you wish to discuss how the new rules on commercial property may affect you please get in touch with us by contacting James Cohen  who is also a notary public and STEP qualified: [email protected] or 0207 822 2222.