The UK real estate market has undergone a significant number of tax changes in recent years including an extension of the scope of UK inheritance tax and the onset of a series of changes to the taxation of chargeable gains arising to non-UK residents.
The situation to come
The UK government has announced a number of further changes including an extension to the scope of UK tax so that disposals of all UK commercial and residential property directly held by non-UK residents are subject to UK tax with effect from April 2019. Indirectly held interests are also within scope of the new rules in many circumstances. Broadly, a sale of shares will be within the scope of UK tax if over 75% of the gross asset value of the company is derived from UK property (i.e. a property rich company) and where the vendor has owned 25% or more of the share capital (or equivalent) in the previous two years.
This combined with the UK government’s confirmation that it will bring corporate non-resident landlords within the charge to corporation tax rather than income tax with effect from April 2020 means that non-UK residents investing in UK property need to prepare now. Investors need to understand the upcoming changes and determine the potential impact of the move, including both the tax impact as well as the impact of new corporation tax compliance process and requirements.
Tax on chargeable gains
The UK government have recently published initial draft legislation and a consultation response document in relation to the proposed extension of nonresident capital gains tax to all direct and indirect disposals of UK property. One key area where discussions are continuing between HMRC and industry and further clarity is sought is in relation to the treatment of funds to ensure that key issues are addressed, namely multiple taxation within fund structures and the treatment of tax exempt investors. This continued discussion is encouraging and we are hopeful that further details will be released shortly.
Asset values should be rebased in April 2019 so that only gains realised after that date are subject to tax on disposals under the new rules. Valuations should be obtained to support the rebasing and it should be noted that an election will be required to disapply the rebasing in order to use historic cost if preferred for directly held properties only. Rebasing is compulsory for property rich companies.
Corporate non-resident landlords
The move to corporation tax for corporate non-resident landlords attracts a lower rate of tax with 17% applicable from 1 April 2020 but also brings with it additional Investment in UK real estate: the impact of proposed tax changes. considerations on various matters including the availability of a deduction for interest expenses incurred, loss relief restrictions and group relief. From a cashflow perspective, consideration should be given to whether the company is brought within the corporation tax quarterly instalment payment regime meaning that tax payments will be accelerated.
From a practical perspective, corporate non-resident landlords will be required to prepare and file GAAP compliant financial statements in a specified format (iXBRL) to accompany the submission of the corporation tax returns.
The upcoming tax changes are not limited to direct taxes on UK real estate and commercial property as owners may also be affected by the VAT changes (‘Making Tax Digital for VAT’) which apply to the first VAT period starting on or after 1 April 2019.
This requires UK VAT registered businesses with taxable turnover above the VAT registration threshold to keep records in digital form and file their VAT returns using functional compatible software. The software used must be capable of keeping and maintaining the records specified in the regulations, preparing VAT returns using the information maintained in those digital records and communicating with HMRC digitally via their API platform.
There are various considerations to take into account depending on an investor’s specific fact pattern but by being pro-active, organised and obtaining proper advice, these can be clearly navigated. The motive behind a number of the changes above is to create a level playing field between onshore and offshore investors with regards to UK tax and allows investors to choose their preferred jurisdiction based on other considerations such as suitability and robustness of the jurisdiction’s laws and regulatory framework.
It is our view that Jersey will remain an attractive option for investing into UK real estate given its globally recognised and longstanding expertise in structuring for this asset class and market. Competing jurisdictions find it difficult to match the robust regulatory and legal frameworks which Jersey is known for. Although political noise and some turbulence is expected to arise from Brexit issues throughout the remainder of the year, the withdrawal issues are not expected to have a significant impact on real estate and the UK’s historic reputation for having a sophisticated property market is likely to continue to attract inbound investment.
Hawksford is well placed to provide onshore and/or offshore services to suit client needs due to our global reach and substantial experience of working on investments in residential, commercial and development property.
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