Major Extension of CGT on Property Owned by Non-residents
The Chancellor did not make much of a fuss of it in the Autumn Budget speech. In the printed Budget Report it only merits one short paragraph. However, the change in Capital Gains Taxation which it introduces could have a very important effect on the property market.
The paragraph reads: “To align the UK with other countries and remove an advantage which non-residents have over UK residents, all gains on non-resident disposals of UK property will be brought within the scope of UK tax. This will apply to gains accrued on or after April 2019.”
A consultation paper published just after the Chancellor sat down, explained in greater detail just how sweeping this is. Currently, CGT applies to gains on the disposal of residential property owned by closely-held companies, under the “ATED” regime (Annual Tax on Enveloped Dwellings). It has also applied, since April 2015, to gains on the disposal on residential property by non-resident individuals although, confusingly, the exact rules and rates differ on whether the sale is by an individual or a company. Other forms of property, however (agricultural land, offices, hotels, student accommodation and retail space, for instance were still tax-free for non-residents. Experts had commented that it was rather ridiculous to have different rules to tackle the same problem – tax-free gains made by foreign residents owning flats and houses in the UK, particularly London under the ATED regime and the person CGT rules.
Rather than just harmonising the rules, however, the government has gone much further. The intention now is to tax all property gains, whether of residential or non-residential property, and whether the disposal is by selling the property itself or by selling the company that owns it. The ATED rules are likely to be subsumed within this new regime.
How, you may ask, will HMRC know if the foreign investor with shares in, say, a British Virgin Islands Company, sells the shares, and with it, the rather nice flat in Knightsbridge which is the company’s sole asset, to someone else? The answer is by putting the onus on professional advisers. The idea seems to be that estate agents and solicitors involved in the sale will have a legal obligation to report the effective change of ownership of the property and to satisfy themselves that the tax is being paid.
How will the government distinguish between wealthy private individuals and true corporate investors whose inward investment to the UK is encouraged? The answer is that companies will only be affected by the indirect disposal rules if they are “property rich” (that is, more than 75% of their assets by value are accounted for by UK property) and if the affected shareholder owns more than 25% of the company.
At this stage, there is a consultation open until February 2018 and new legislation will only come into force from April 2019. there is much detail to be discussed, but this is a change which could affect a lot of people, and a lot of property. Watch this space.