Tax changes for non-residents owning UK property

Published on June 28, 2021

Significant and wide-ranging changes are being introduced in relation to the taxation of UK property, some of which already apply for transactions taking place from 6 April 2019, others taking effect from 6 April 2020.

Real estate held by non-UK residents

From 6 April 2019, disposals of UK commercial property by non-residents have been brought into line with the regime for residential property.

This means that non-resident owners of all types of UK real estate that are not companies now need to complete a non-resident capital gains tax (NRCGT) return and pay the associated tax within 30 days of completion of any disposal of such property (unless the non-resident owner already files UK self-assessment tax returns). 

Non-resident companies are subject to the same broad rules on the disposal of UK property, including the extension to tax commercial property from 6 April 2019. However, they are instead subject to corporation tax on gains arising with effect from 6 April 2019 and will need to register for corporation tax within three months of completion and pay the associated tax within a further 14 days for all such disposals. Associated corporation tax returns will be due within 12 months of completion. It is notable, however, that the UK corporation tax rate is currently 19 per cent, which compares favourably against the rates of capital gains tax previously payable by non-resident companies on residential property disposals of 20 per cent or 28 per cent.

An optional ‘rebasing’ of commercial property value as at 5 April 2019 is available, meaning that only the growth in value from that date is taxable.

‘Property-rich entities’

The capital gains regime has also been extended to tax disposals of property-rich entities (ie entities that derive at least 75 per cent of their value from UK land) with effect from 6 April 2019. However, exemptions apply, in certain circumstances, including:

  • for disposals of companies with real estate used for the purpose of a qualifying trade such as retail, restaurants or hotels; and
  • for investors who, together with related persons, hold a less than 25 per cent interest in the property-rich entity, although this exemption does not generally apply to disposals of holdings in collective investment vehicles including real estate investment trusts (REITs).

It should also be noted that where there is a double tax treaty between the UK and the non-resident’s jurisdiction, the treaty should be considered as it may deny the UK government’s right to tax such disposals. While this could provide treaty protection for many non-resident investors in UK property, including real estate funds and joint venture arrangements, the new regime includes rules to prevent new ownership structures being set up specifically to take advantage of double tax treaty provisions.

Corporation tax on non-resident corporate landlords

Although there are additional administrative requirements, some potential further good news for corporate landlords is that, from 6 April 2020, non-resident companies will be subject to corporation tax on their rental income as well as gains made on the disposal of UK property.

Again, the lower corporation tax rate (which is set to reduce to 17 per cent from 1 April 2020) provides an instant reduction compared to the current rate of income tax payable by non-resident companies of 20 per cent.

However, where annual interest costs exceed £2m, this benefit could potentially be offset by restrictions to tax relief available on those interest costs. Also, in all cases it may be necessary to prepare accounts to be submitted to HMRC along with the annual corporation tax return, which could significantly increase compliance costs for many non-residents corporate landlords.

A balanced but complex regime

The new regime is intended to result in a more level playing field between UK resident and non-resident investors in UK property. Whilst it goes a long way to achieving this objective, the new regime is highly complex, in particular as a result of measures to ensure continuity of treatment for investments made through certain exempt UK entities. All non-UK resident individuals and entities with interests (direct or indirect) in UK land should review their tax position in light of the extension of the territorial scope of the UK chargeable gains regime.

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