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Taxing Capital Gains in UK Real Estate - What does it mean for non-UK resident investors?

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Taxing Capital Gains in UK Real Estate - What does it mean for non-UK resident investors?

Nick Terry is a Director in the Real Estate team at Ocorian and is a Chartered Surveyor with nearly 20 years' experience in the Real Estate industry. Here he evaluates HMRC's official response to consultations with industry bodies regarding taxing Capital Gains made by non-UK resident investors in UK Real Estate.

In the 2017 Autumn Budget, the Chancellor made one of the most surprising announcements for years when he stated the intention to "level the playing field" for UK and non-UK based investors into UK Real Estate.

There followed a consultation which closed on 16th February 2018 and received over 120 responses from industry bodies including AREF, IPF, RICS, Jersey Funds Association and Jersey Finance.

HMRC's response (the "Response") was released on Friday 6th July and can be downloaded in full here

Key takeaways

Of core concern to the respondents were three central areas:

  • UK Real Estate is a major asset class for overseas investors to invest into and it was important that this inward investment stream was not interrupted.
  • It was important that UK tax-exempt investors (such as pension funds) were not subject to unintended levels of taxation.
  • Whilst there was a general view that the levelling of the playing field was not unfair, overseas investors should not be overly penalised.

Among the points arising from the Response were confirmations that the changes will come into effect from April 2019 and there will be potential to 'rebase' asset values with effect from April 2019 (such rebasing will not be able to create an allowable loss for use in any Corporation Tax returns).

Where indirect disposals of UK Real Estate are made, an entity will be considered within scope if it is "property rich", meaning that it derives 75% or more of its value from UK Real Estate. There are specific exemptions available for 'trading' entities where property ownership is incidental to a core business line (e.g. hotels, care homes, retailers etc). However, the exact mechanics of this remain to be finalised.

Where a transaction relates to the indirect disposal of UK Real Estate (e.g. through the sale of shares in a property rich entity), then any investor with a holding of 25% or more will be liable for CGT. This ownership test was originally proposed to look back five years; however, some comfort can be taken from its reduction to just two. The test will also exempt investors whose holding was for an "insignificant" period of time, which should benefit seed investors and entities that hold assets for a short period as part of a wider restructuring.

There has also been some simplification of the 'acting together' rules to the benefit of smaller investors, such that they should only apply to 'connected individuals' (e.g. family members) or where corporate owners are connected. Furthermore, investors into Partnerships will not be deemed 'connected' purely on account of their investment into the Partnership, this is likely to be of benefit to many 'club' and 'syndicated' deals.

Note - The treatment for investors into fund vehicles is slightly different, with all non-exempt investors being taxed, irrespective of their percentage holding. HMRC's thought process being that an investor into a fund will know that the fund is investing into UK Real Estate.

Not as bad as expected

One positive for fund structures however, particularly JPUT's and other Collective Investment Vehicles, is that they and their subsidiary entities may elect to be 'tax transparent'. The detailed mechanics of this are subject to further consultation, but it's likely that in order to elect as tax transparent certain conditions must be met, such as not making capital distributions (although sales and subsequent re-investments are likely to be permitted). This detail is expected to be finalised for the 2018 Autumn Budget.

Further positives are that the complex ATED rules surrounding residential properties will be revoked and the landscape will be simplified with all property coming under the new treatment - whether commercial or residential.

There is also good news for the professional advisors, as the onus for reporting any transaction (which must be done within 30 days) will rest with the entity itself, and not with those advisors.

Investor action points

Core action points for investors include:

  • Plan for the rebasing of values in April 2019; if you can, bring forward refurbishments or material lease events / regears which are aimed at enhancing value;
  • Understand your investor base; which investors might be tax-exempt, and who isn't;
  • Ensure you know which of your entities are 'property rich' in this context; and
  • Make sure that you / your administrators can effectively track the ownership records of each entity which could be deemed to be 'property rich'.

To find out how Ocorian's Real Estate team can help you or your company, go here.

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