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UK Real Estate Capital Gains Tax Implications for Non-UK Residents

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UK Real Estate Capital Gains Tax Implications for Non-UK Residents

On 7th November 2018 the UK Government published the UK Finance (No 3) Bill (the "Bill") which contained details of the upcoming changes to the charging of Capital Gains Tax ("CGT") to non-UK-residents upon the disposal of either directly held UK Real Estate or the shares in "UK-property rich" companies. 

Background

The UK Government initially stated their intention to levy such charges in the November 2017 Budget, and, following a consultation period, issued draft guidance in July 2018. Our synopsis of the background and the July guidance can be seen here. Within the July guidance, HMRC acknowledged that concerns had been raised about the potentially adverse treatment of commonly used fund structures such as JPUT's, GPUT's, Limited Partnerships and offshore REITs.

HMRC then spent time over the summer engaging with various stakeholders, before finalising the content of the Bill.

New provisions

In the Bill, HMRC have offered existing Collective Investment Vehicles ("CIVs") the ability to make either a Transparency Election or an Exemption Election. There are differences between these elections which we will examine below, but it is likely that depending on the identity and tax status of the ultimate investors, the making of an election may well be desirable for many qualifying CIVs.

Ultimately, if an election is made then gains arising within the fund or its structure will not be taxable, rather a taxable charge will arise when the fund's investors dispose of their interest in the fund (unless their status means they are a tax exempt investor). If no election is made then entities will become opaque and chargeable for gains relating to direct or indirect UK commercial property disposals.

However, it's helpful to note that the Bill confirms that offshore CIVs which are Partnerships will remain transparent for gains and will therefore not have to make an election.

Limited Partnerships & REITs

The Bill is also favourable to the treatment of Real Estate Investment Trusts ("REITs"), including offshore companies operating as a REIT (e.g. Jersey companies listed on The International Stock Exchange ("TISE") but acting as a UK REIT). Historically, UK REITs have not been subject to CGT on the disposal of direct UK Property holdings, and will now also have that exemption extended to include the disposal of shares in UK property-rich Companies.

The Bill further favours the REIT through an amendment which sees all UK property-rich companies (or deemed companies) which are owned by a REIT also becoming exempt from UK tax.

 

Transparency Election

Exemption Election

Eligibility

A CIV which is non-UK resident and UK property-rich.

 

Must be income tax transparent.

A CIV which is non-UK resident and UK property-rich.

 

Must meet a genuine 'diversity of ownership' test.

Permissions

Every investor at the point of election must consent to the election.

Manager can elect (investor approval NOT required).

Timing

Election must be made within 12 months of 6th April 2019 (i.e. by 5th April 2020), or if the CIV is created after this date, it must elect within 12 months of first acquiring UK Property.

Election to be with effect from 6th April 2019, or at a later date up to 12 months' retrospectively. If done at a later date, details of any disposals in the CIV during the last two years (or from 6th April 2019 if later) must be reported.

Term

Irrevocable (even on change in ownership of the CIV).

Can be revoked.

Substructure

Unaffected, each level below would need to make its own election.

Any entities owned (at least 40%) by the CIV will also become exempt.

Reporting Requirements

Yes - annual UK partnership returns including disposals and investor changes.

Yes - annual filings to HMRC disclosing details of the CIV and its group.

Other Requirements

 

If the CIV is an AIF, it will also need to be classed as a CIV on another basis in order to be eligible.

Likely use

Narrowly held JPUT's / GPUT's.

More widely held CIV's.

 

What actions should investors/managers take on existing structures?

  • Ascertain the tax status of the investors.
  • Re-familiarisation with the structures and underlying assets.
  • Are there other stakeholders to consider (other investors, JV Partners, lenders etc.)?
  • Update cash flow modelling to consider the cost of 'doing nothing' (remember asset values can be rebased as at 6th April 2019,* so only gains arising AFTER this date are relevant).
  • Consider what options might be available and elections might be made.
  • Ascertain what communication must go to, or consents will be required from, investors or other stakeholders.
  • Finalise timeline and action plan.

*Remember of course that the 6th April is a week after the UK is due to leave the European Union, therefore asset prices may be subject to fluctuations around that point in time. There is no requirement to rebase the value, if it would be to a lower value than acquisition.

Will future structures be different?

Naturally, all decisions should be made based on the particulars of the investment and the requirements of the investors at the time.

There remain a number of very valid reasons for utilising non-UK resident structures, such as suitability and flexibility of the available fund and holding structures, familiarity with those structures, asset class expertise, local privacy laws and the potential for stamp duty savings on exits via share transfers.

Certain jurisdictions may also allow losses to be carried forward further than in the UK and permit any losses to be offset (as opposed to just offsetting trading losses under the UK's rules).

Each structure, however, should be considered on its own merits and care should be taken to ensure that any administrators which are appointed, will be well positioned to facilitate the reporting requirements which will need to be undertaken if a structure makes either a Transparency or Exemption Election.

We are seeing an increased interest in REIT structures, and it seems that an efficient method of creating a REIT may involve utilising a Jersey Company, listed on TISE and managed and controlled in the UK.

It should be remembered that the Limited Partnerships themselves will retain their tax-transparent nature, but entities held beneath the LP may need to elect for either transparency or exemption.

It's likely that in the future, property unit trusts and other direct asset holding structures with a small number of tax exempt investors may opt to make a Transparency Election. However, it feels likely that more widely held or complex structures, with a mixture of exempt and non-exempt investors, will prefer to either make an Exemption Election for their fund or form a UK REIT.

What are Ocorian doing?

Ocorian hold a full suite of funds licences and are well positioned to assist existing clients in making Transparency or Exemption Elections.

In addition, at Ocorian we have invested heavily in our technological platform which enables us to generate detailed, bespoke reporting on a cost efficient basis for our clients. This is likely to be beneficial when undertaking annual reporting under the Exemptions framework. Learn more about our Real Estate offering here.

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