All change: non-residents and UK property

Changes to the way non-residents holding UK land and property are taxed were included in the draft legislation for Finance Bill 2018-19. What are these changes and how will they affect your clients?

A number of changes to the way non-residents that hold UK land and property are taxed are included in the draft legislation for Finance Bill 2018-19, published on 6 July 2018. Some of these are intended to come into force as early as April 2019, meaning that clients and their advisers have less than eight months to get to grips with them.

This article provides a brief overview of these changes and highlights some key points to consider. Readers who think a provision may be relevant to their clients should consult the relevant draft legislation and explanatory notes for the Finance Bill.

Extension of scope of Non-Resident Capital Gains tax

Since April 2015, all non-UK resident individuals, closely held companies, trustees, personal representatives and funds have been subject to non-resident capital gains tax (NRCGT) when disposing of UK residential property (see s14B to 14H and Schedule 4ZZB TCGA 1992).

With effect from April 2019, the scope of NRCGT will be expanded to also cover disposals of:
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Non-residential (i.e. commercial) UK property; and
“Substantial” interests in “UK property rich entities” – referred to as “indirect disposals” (see below).

Non-resident diversely held companies, widely held funds and life assurance companies will also be brought into the scope of NRCGT for the first time from April 2019. All non-UK resident companies, including close companies, will be charged to corporation tax rather than capital gains tax on their gains.

Where an asset is brought into NRCGT for the first time as a result of these changes, it can be rebased to its April 2019 market value, ensuring no gain arising prior to that date is subject to UK tax. Assets already in the scope of NRCGT (e.g. UK residential property) will continue to be rebased to April 2015.

A side effect of these changes, and one which may please many tax advisers, is that Annual Tax on Enveloped Dwellings (ATED)-related CGT will be abolished from April 2019.

Indirect disposals and NRCGT

The provisions for indirect disposals are complex and are intended to catch, for example, the situation where a non-resident sells shares in a company which holds UK land as an investment.

For an indirect disposal to be subject to NRCGT, the following conditions have to be met:

The disposal has to be of a right or interest in a “property rich” company – broadly one which, at the time of disposal, derives at least 75% of the total gross market value of its assets from interests in UK land; and
The non-resident investor must have a “substantial indirect interest” in the UK land – broadly at any time in the two years prior to disposal they (together with certain connected parties) had at least a 25% investment either directly, or indirectly, in the “property rich” company.

There is a helpful exemption – if all of the UK property (or all but an insignificant value) has been used for trading purposes throughout the year leading up to the disposal, and it is reasonable to conclude it will continue to be so used after the disposal, then the NRCGT rules won’t apply. This should mean for example that most investments by non-resident investors in UK retail and hospitality businesses are exempt.

Payments on account for residential property gains

Another proposed change will affect both UK residents and non-residents who own residential property.

From April 2020, UK residents will be required to make CGT payments on account and file returns within 30 days of disposing of a residential property in a similar way as for NRCGT. The change will not apply where the gain is not subject to CGT (e.g. because it is covered by private residence relief).

For non-UK residents, the existing NRCGT 30-day filing and payment on account requirement will be extended:

To apply to all companies from 6 April 2019; and
To remove the exception for making a payment on account where a self-assessment return is filed for disposals on or after 6 April 2020.

Non-UK resident companies carrying on a UK property business

From April 2020, non-UK resident companies carrying on a UK property business will become subject to corporation tax rather than income tax.

This raises several practical issues:

The corporation tax rules, including the corporate interest restriction and other anti-avoidance provisions will apply.
Existing income tax losses can be set off against future property business profits chargeable to corporation tax, but will not be available for group relief or use against other profits and will have to be tracked separately.
Non-resident companies will have to comply with the different filing and payment regime of corporation tax – including the requirement to submit returns and computations online in iXBRL format.

Conclusion

As can be seen, the proposed changes are quite wide ranging and could have a major impact on non-residents with UK property interests.

If you have non-UK resident clients, it is probably worth speaking to them about the changes as soon as possible. Things to consider include:

You may want to make clients who will be brought within NRCGT for the first time aware that any disposal after April 2019 may give rise to filing obligations and tax so they can plan accordingly. (This may include obtaining an April 2019 valuation for rebasing purposes.)
Would you be able to spot if a non-resident client made an indirect disposal subject to NRCGT?
Do you have a system in place to ensure clients inform you of relevant disposals as soon as possible so that they can meet the 30-day payment and filing deadlines?
For non-resident corporate clients with a UK property business, you may want to flag up the change to corporation tax in 2020, and what this will mean in terms of administrative burdens and costs.

Author – Emma Rawson is technical officer at the ATT. ATT Technical Officer
Date published August 6, 2018

UK: Real Estate Investor Sentiment ‘Unsettled’ By New UK Capital Gains Tax Regime

UK: Real Estate Investor Sentiment ‘Unsettled’ By New UK Capital Gains Tax Regime
Last Updated: 17 May 2018
Article by Jon Barratt and Paul Lawrence
Intertrust

Nearly two thirds (61%) of real estate investors are concerned by the impact of changes to UK Capital Gains Tax (CGT)
Leading concern is transaction costs for restructuring interests
32% say they will have to alter their structures

Nearly two thirds (61%) of real estate investors are concerned about the impact of the new regime on taxing gains made by non-resident investors on UK real estate according to a new report commissioned by Intertrust, the leading global provider of high-value trust, corporate and fund services. This includes 13% of property investors who are ‘extremely’ concerned, according to the survey.

Under the new changes, which are due to come into effect in April 2019, non-resident investors will pay Capital Gains Tax (CGT) on disposals of all types of UK real estate, extending rules that currently apply to residential property only. The rule changes are designed to create a single regime for disposals of commercial and residential real estate and a level playing field for UK and non-UK based investors.

These changes have sparked a wave of uncertainty among real estate investors, according to the survey. The leading concern associated with the changes, cited by 57% of investors, was the amount of transaction costs they will incur for restructuring their interests.

Intertrust’s survey also asked respondents about their likely response to the changes, with 32% saying that they will need to alter their structures. Given the complexity of this process, many investors said that they would be seeking external assistance, with 22% having either already consulted, or planning to consult, with advisors on how to manage the change.

“With the new CGT regime presenting a fundamental shift in the international property investment landscape, we’re seeing an increasing number of clients turn to us to discuss what exactly the changes mean for them and their investments,” said Jon Barratt, Head of Real Estate at Intertrust.

“With 40% of investors having maintained or increased their allocations to UK property over the last 12 months, the UK has continued to be one of the most popular destinations for overseas capital. Whether the UK retains its appeal over the next year remains to be seen. This change to CGT is just one more area of uncertainty in a market already exposed to the unknown outcomes of Brexit.”

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

UK: Tax-Efficient Investment In UK Residential Property For Non-Residents: A Guide

Last Updated: 23 May 2018
Article by Terence Pay
Verfides

UK real estate, particularly prime property in London, has always attracted significant international investment.

Many investors are simply looking to purchase a single UK property, perhaps to use as a London base, whilst others wish to invest in a portfolio of properties under single ultimate ownership. Many of these properties will be rented on the open market.

Advice should always be taken in advance of any purchase of UK real estate. The tax legislation in this area has changed significantly over recent years and care needs to be taken to ensure that the investment is structured in the most tax efficient manner. Taxes may be levied on rents, development profits and capital gains, and there are also stamp taxes, the ATED (Annual Tax on Enveloped Dwellings) and inheritance tax to consider.

This guide highlights the main tax issues to consider when investing in UK residential property.
INDIVIDUAL OWNERSHIP
Stamp Duty Land Tax

Stamp Duty Land Tax (SDLT) is payable by the purchaser at rates of between 0%-12% for residential property. Where a second residential property is purchased, the standard rates are increased by 3%.
Capital Gains Tax

From 6 April 2015, non-resident individuals are liable to capital gains tax (CGT) on the disposal of UK residential property, although only the portion of the gain arising after 6 April 2015 is taxable. The top rate of CGT is 28%.

Note that there may be a different tax treatment where a property is acquired, developed and sold on in a relatively short period of time, or where a main purpose of acquiring the property was to realise a profit on sale. In such cases, the profits are normally chargeable to income tax (or corporation tax if the gain is realised by a company), not capital gains tax.
Income Tax

Profits deriving from UK rental receipts are taxable in the UK in all cases. For non-resident individuals, the tax rate is between 20% and 45% depending on the level of profits and any other UK source income received by the taxpayer during the relevant tax year.

The letting agent or tenant is required to withhold 20% tax from net rents paid to a non-resident landlord. However, under the Non-Resident Landlords Scheme, approval can be obtained from HMRC for rents to be paid gross, providing an annual tax return is filed and tax paid on time.
Inheritance Tax

UK property is subject to inheritance tax (IHT) in the UK. Inheritance tax is charged at a flat rate of 40% above the nil rate band, which is currently £325,000 per individual. The nil rate band is transferable between married couples and civil partners. The IHT liability may be mitigated by taking out a third party debt secured on the property, although this would usually need to be done at the time of purchase. Further advice should be obtained.
COMPANY OWNERSHIP

There have been a number of tax changes over recent years, intended to discourage ownership of UK residential property through a corporate vehicle. The main changes in this area include:

Stamp Duty Land Tax (SDLT). A 15% rate of SDLT now applies to acquisitions of single dwellings valued at more than £500,000 by companies and certain other non-natural persons (NNPs).
Annual Tax on Enveloped Dwellings (ATED). ATED was introduced from 6 April 2013. It is an annual tax charge that applies to companies and other non-natural persons owning residential property valued in excess of £500,000.
ATED-related CGT. This applies to all disposals of residential property within the charge to ATED, at a flat rate of 28%.

Exemptions from the above charges may apply in certain situations (see below).

Non-Resident Capital Gains Tax (NRCGT). With effect from 6 April 2015, all non-residents (including companies and individuals) are liable to CGT on the disposal of UK residential property. Properties outside the scope of ATED-related CGT are within the charge to NRCGT, but only on the portion of the gain arising after 6 April 2015.

Note that disposals of shares in companies owning UK residential property are currently outside the charge to CGT when made by a non-resident, although this is likely to change with effect from 6 April 2019.

Inheritance Tax. With effect from 6 April 2017, UK inheritance tax was extended to UK residential property held by a non-UK company. This has been achieved by treating the shares of a company as UK situs assets, to the extent that the value of the shares is attributable to UK residential property. Following these changes, it is now no longer possible for a non-UK domiciled individual to avoid UK IHT on residential property by owning it through a non-UK company.

Below is a summary of the main points of the ATED and CGT legislation affecting UK residential properties held by a corporate vehicle.
Annual Tax on Enveloped Dwellings (ATED)

When the ATED was introduced in 2013, the threshold was set at £2 million, such that only properties worth above this amount were chargeable. However, the government has gradually reduced the threshold so that many more properties now fall within the ATED regime. The threshold is currently £500,000.

The ATED charges for the period 1 April 2017 to 31 March 2018 are:
Property Value £500,000 – £1m £1m – £2m £2m – £5m £5m – £10m £10m – £20m >£20m
Annual Charge £3,600 £7,250 £24,250 £56,550 £113,400 £226,950

The NNPs which may be taxable under the ATED are restricted to:

Companies, where that company has a beneficial interest in such a property (i.e. not where it acts as mere nominee for an individual);
Partnerships, where one or more partners is a company; and
Collective Investment schemes.

Trustees (including corporate trustees) are not subject to the ATED where they hold property directly.
ATED-related CGT

ATED-related CGT was introduced alongside the ATED, with effect from 6 April 2013. ATED-related CGT applies on the disposal of UK residential property by certain NNPs within the charge to ATED. The rate of ATED-related CGT is 28%.

Where the property was purchased before 6 April 2013, the charge to ATED-related CGT only applies to the part of the gain which accrued on or after 6 April 2013 (or the date that the property became within the ATED regime, if later).

Trustees are not within the charge to ATED-related CGT on direct disposal of such properties.
Exemptions

Exemptions from the 15% SDLT rate, the ATED and ATED-related CGT charges include:

Property development businesses
Properties let out as part of a property rental business where let out to third parties on a commercial basis (in most cases this will exempt properties acquired as “buy-to-lets”)
Farmhouses and properties held by trading companies for the use of employees

As a result of the reduction in the ATED threshold to £500,000 and the increase in the ATED charges (by more than 50% since the regime was introduced in 2013), together with the 15% Stamp Duty Land Tax rate, exposure to the ATED-related CGT charge, and Inheritance Tax, corporate ownership is unlikely to be a tax efficient form of ownership for most new purchases of UK residential property, unless one of the above exemptions applies.

Individuals with UK residential property held in existing structures should review the impact of the recent increases in the annual ATED charges and the IHT changes to determine whether UK properties should be taken out of the structure and placed into personal ownership. Changing the ownership could give rise to tax charges and therefore it is essential to take professional advice to fully understand all the tax implications. Please refer to our briefing entitled ‘De-enveloping’ for further information.

Professional advice should always be taken to assess the effectiveness of any structure with regards to all relevant taxes.
SUMMARY

UK real estate continues to represent a popular investment choice for non-residents. Structured carefully, the UK and international tax leakage can be minimised.

Where an investment has been or will be made into residential property worth in excess of £500,000, further advice should be sought in the light of the ATED regime and associated tax charges where a corporate structure is being considered. However, a corporate ownership structure may still be beneficial provided one of the exemptions from the 15% SDLT rate, the ATED charge and the ATED-related CGT charge is available.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Guide to Making UK Tax Digital for Businesses

Making Tax Digital – Author, Emma Smith, February 19, 2018

Making Tax Digital (MTD) was first announced by the government in 2015 as an initiative to improve the effectiveness and efficiency of the UK tax system, and reduce its complexity.

The government’s original goal was to transform the tax system by 2020 by introducing digital recordkeeping and quarterly updating for businesses, the self-employed and landlords for income tax self-assessments, value-added tax and corporation tax.

The original timeline set out by the government proposed a phased introduction of MTD between the 2018-19 and 2020-21 tax years.

However, following consultation with the industry, in July 2017 the government announced that it would delay the introduction of MTD to April 2019 at which date the scheme would only apply to VAT. It said that the initiative would be extended to taxes other than VAT by 2020 at the earliest.

So, what is required under MTD and how will the initiative affect businesses?
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Reasons for MTD

The government has said that one of the main reasons behind the MTD scheme is to help close the tax gap by helping businesses to “get their tax right”. It has estimated that over £9bn is lost annually as a result of tax errors and mistakes.

The government has also outlined some of the key benefits of the MTD scheme for businesses, including the ability to know where they stand when it comes to tax affairs; being able to access tax information online in one place; being able to work collaboratively with an agent; and being able to plan and budget effectively. These benefits will enable businesses to drive performance and successfully manage their financial affairs. According to the government, benefits of MTD for businesses include remaining competitive, boosting productivity and being able to capitalise on going digital through cost and efficiency improvements.
What will change for businesses under MTD?

MTD for VAT

From April 2019, businesses that are registered for VAT and have turnover above the VAT registration threshold of £85,000 will be required to keep digital records for VAT purposes and submit their VAT return to HMRC through MTD compatible software.

Businesses will need to keep the following information as digital records:

Business name, principle place of business and VAT registration number (to also include the VAT accounting scheme used by the business)
The VAT account showing the audit trail between primary records and the VAT return
Details about supplies made and received

Businesses will need to submit their VAT returns using compatible software, which will pull information from the digital records.

Digital records will need to be preserved for up to six years.

If businesses need to make amendments to their VAT return, the existing error correction rules will apply. This involves correcting non-deliberate errors on the next VAT return (errors must be within the four-year limit). Errors that do not fall into this category should be recorded through the submission of form VAT652.

MTD for corporation tax

MTD for corporation tax will not come into effect until 2020 at the earliest. HMRC has said that the scope of the initiative will not be widened outside of VAT until the system “has been shown to work” and to provide sufficient time to test the system fully.

Self-employed and landlords

VAT-registered businesses and landlords with income above the £85,000 VAT threshold will need to report for VAT purposes only from April 2019.
Voluntary participation

Businesses that are not required to begin keeping digital records for VAT from April 2019 will still be able to participate on a voluntary basis. HMRC has said that it expects many businesses to move to the system in April 2019 even if not required to do so.

Businesses will also be able to submit VAT data on a more frequent basis than mandated. Voluntary updates submitted outside of the VAT return cycle could be used in situations where a business wishes to notify HMRC of a change in circumstances.
Exemptions

Exemptions from MTD for VAT will apply to a number of businesses. These include businesses that are unable to use electronic communications because or religious beliefs; insolvent businesses; and businesses that are unable to submit returns electronically because of disability, age or remoteness of location.
Costs

Businesses are likely to face one-off costs and ongoing costs.

One-off costs will enable a business to transition to the MTD scheme. These include the time spent implementing new software for compliance with MTD; purchasing new or upgrading existing hardware; accountancy or agents costs to support the MTD move; and training staff in the MTD process.

Ongoing costs for businesses include moving to MTD compatible software; using bridging software to support MTD compatibility for spreadsheets; and increases on current software costs as a result of businesses bearing the burden of the MTD software improvement costs.
Software

Businesses must use software that can connect to HMRC systems via an Application Programming Interface (API) in order to comply fully with MTD. As such, the software must be able to:

Keep digital records in accordance to MTD regulations
Preserve digital records in line with MTD regulations
Create a VAT return with digital information held by the software and digitally send this information to HMRC
Provide VAT data on a voluntary basis to HMRC
Receive information from HMRC via the API platform with regard to an entity’s compliance with obligations under MTD regulations

HMRC started a limited pilot for VAT in 2017. The pilot is due to expand in spring 2018.
Penalties and interest

HMRC has previously consulted on the penalties regime for MTD. The system is likely to be a points-based model with taxpayers receiving a point every time they fail to submit on time. The model is likely to be introduced for VAT in 2020 once taxpayers in the April 2019 intake have become familiar with the system.