Taxing gains by non-residents on UK immoveable property - Collective investment vehicles
The Government recognised that collective investment vehicles present different challenges and had made industry groups aware legislation on the changes for them would be deferred. However, a short statement of the proposals has been announced, to include the following:
- an option for non-resident investors to elect for transparent funds (such as Jersey Property Unit Trusts, JPUTs) to be treated as transparent for CGT purposes (they will default to opaque as under the current rules). This is expected to benefit investors qualifying for an exemption from UK tax
- a potential exemption for offshore funds, provided they are not ‘close’ and abide by certain reporting requirements. The definition of ‘close’ for these purposes is still to be confirmed, but would likely follow a similar test as used for UK real estate investment trusts (REITs).
One worrying suggestion on collective investment vehicles is a proposal to remove the 25% threshold, such that all investors in property funds would be charged to tax on an indirect disposal, regardless of the size of their holding. While this would simplify fund administration, meaning they would no longer need to maintain rolling records of investors and their holdings for at least two years, it would drag many more investors in real estate funds into the charge to tax. It would be unfair to treat investors in real estate funds differently from shareholders in property-owning companies, which would benefit from the 25% threshold.
These measures are subject to further consultation and there is still a significant element of uncertainty, despite being only eight months away from the new rules coming into force.
Taxing gains by non-residents on UK immoveable property – UK-Luxembourg tax Treaty
The UK and Luxembourg have now ratified the Multi-Lateral Instrument (MLI), introducing a number of Base Erosion and Profit Shifting (BEPS) recommendations into their double-tax treaty agreements.
The MLI includes a “property-rich” clause, meaning that gains on the sale of shares in a company deriving more than 50% of their value from real estate will be taxed in the country where the real estate is located. Whilst the UK has ratified the MLI to include this clause, Luxembourg has opted out. So indirect disposals of shares in Luxembourg companies could in certain circumstances be covered by the treaty so that the UK does not have taxing rights.
The Government confirms that it is “in discussion with Luxembourg” and will pursue inclusion of the land-rich clause. In the meantime, an anti-forestalling rule introduced in the Autumn Statement will operate to tackle treaty abuse.
Capital gains tax legislative rewrite
The Government has re-written existing CGT legislation and “consolidated” changes made since 1992, when the main CGT Act received Royal Assent.
The Government states that the re-write is purely a ‘restatement’ and will not change the operation of existing provisions. While we have not confirmed this to be the case, on first reading the final result appears to be a welcome simplification of the law.
Non-resident landlords – move from income tax to corporation tax
Non-resident landlord (NRL) companies will move from income tax to corporation tax from 6 April 2020. While NRLs will welcome the reduction in the rate of tax from 20% to 17% by April 2020, the corporation tax regime contains complex provisions, particularly with regard to interest deductibility, which NRLs will need to get to grips with quickly.
The timing will be frustrating for many corporate NRLs, which submit tax returns on the basis of their results to 31 March. They will have a five day period to report under income tax rules before the corporation tax rules kick in. There should be the option of an election to bring forward the start-date of corporation tax to 1 April 2020.
Reduction in deadlines for reporting and payment of tax
SDLT: The deadline for filing stamp duty land tax (SDLT) returns and paying SDLT is reduced from 30 to 14 days from the effective date of the transaction.
CGT: The reporting window for CGT disposals for non-residents or for non-corporate UK residents disposing of residential property not qualifying for principal private residence relief will be reduced to 30 days, with a payment on account of the CGT due within the 30 day reporting window.
Corporate Interest Restriction
A helpful practical point was the extension of the period for appointing a reporting company for a group from six to 12 months. A Group can now appoint a reporting company shortly before filing its Corporate Interest Return.
Capital allowances – OTS review and simplification
The Office of Tax Simplification (OTS) review of capital allowances was announced in June 2018, concluding that capital allowances should remain as the primary method for obtaining tax relief on capital expenditure, rather than a move to a depreciation-based tax system.
Further amendments are expected, including proposals to simplify capital allowances, widening its scope to include expenditure on all business assets without the need for any kind of segregation exercise.
The technical consultation on the draft legislation runs until 31 August 2018 and we can expect further draft legislation in the autumn. The Government is currently renegotiating the UK-Luxembourg double tax treaty as outlined above.
In the medium-term, we expect property funds to be considering their structures and portfolios and to be setting up measures to monitor shareholdings. We may see a consolidation of structures, whereby OpCo PropCo models are combined to take advantage of the new trading exemption or possibly the substantial shareholding exemption (SSE), rather than separating out the property assets from the trading company.
In the longer-term, we can expect these rules to be tweaked as they bed in and as various issues come to light. Finally, we wonder whether the Government may in future introduce a SDLT charge on the acquisition of property rich entities. Currently, such acquisitions are charged to stamp duty at 0.5% but SDLT charges could rise to 15% for residential properties. While this has not yet been publicly considered, the CGT legislation is now written in a way that could easily be adapted to cover this possibility.
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