The Government has introduced a flurry of wide-ranging tax reforms in recent years, increasing complexity and uncertainty for non-resident investors in UK real estate. Most recently, in the Autumn Budget 2017, the Chancellor launched a consultation on bringing gains on commercial property by offshore investors within the UK tax net.
Aside from introducing an additional tax cost, the proposed changes also raise concerns over whether the administrative burden could deter investors in the short-term, and cause investors to question whether the UK remains a stable environment for investment.
The consultation – what is it and what did we say?
Specifically, the consultation considers how to implement legislation on taxing gains made by non-residents on immovable UK property. The proposals would extend the existing rules for residential property to commercial property and remove some existing exemptions from UK tax on gains on UK residential property. The consultation invited comments and feedback on the proposed policy from property businesses, professional advisers and representative bodies, before closing on 16 February 2018. HMRC will now consider the responses when drafting the legislation.
We responded to the consultation, delivering the following key messages:
Timing is key
Under the proposed changes, non-resident investors will become subject to UK tax on gains realised on UK immovable property from April 2019 (currently only gains on UK residential property are subject to UK tax). In addition, the Autumn Budget 2017 announced that April 2020 will see non-resident landlords (NRLs) holding UK investment property brought within the scope of UK corporation tax. Each of these reforms creates an administrative burden which is already a concern. However the staggered introduction of these reforms compounds the complexity of the administrative burden, all at a time when investors already feel anxious, given the political uncertainties surrounding Brexit. We feel that aligning the changes in April 2020 would give investors sufficient notice and confidence to continue to invest in UK real estate.
Keep it simple
We welcome efforts by the government to align the tax treatment of UK and foreign investors in UK property, and we encourage simplicity in this to maintain the impression of parity. However, it is important to have clarity on key areas, such as collective investment funds, which are drivers for investment into the UK. Where offshore entities or funds do not have UK equivalents, care should be taken in determining the proposed tax treatment to ensure a level playing field and allow taxation in line with their UK counterparts. The proposals as initially drafted could lead to less favourable tax treatments for non-resident fund structures, such as real estate investment trust (REIT) equivalents which under the current proposals will not benefit from reliefs and exemptions in line with their UK counterparts. This means the proposals currently go further than their stated intention of creating a level playing field and actually make offshore structures less attractive than UK ones.
Reduce the burden
Hidden in the small print, the rules contain complexities. The rebasing of assets in 2019 will introduce significant costs to businesses, as they will need to either have their assets professionally valued or provide acceptable evidence of their value at April 2019. For property investors with a number of assets, this could be particularly onerous and/or costly, and it will be important for HMRC to provide clear guidance on what evidence will be acceptable. In addition, the requirement to monitor ownership stakes on a rolling five-year basis to determine whether any investor meets the 25% ownership test for indirect disposals will present new challenges to the way investors run their businesses. This is likely to add markedly to the costs of running property funds.
What are the potential consequences for overseas investors?
The proposed changes will undoubtedly spark discussions between investors and their advisors on how best to invest in UK real estate. One option presents a shift towards onshore holding companies, with the appeal of administrative simplicity. REITs, have already in recent years become more popular, driven by the desire for onshore management, liquidity and their tax advantages. We expect to see even more demand as the tax advantages of offshore structures are swept away with these changes. Listings on the newly re-branded TISE (the International Stock Exchange) to include Isle of Man are a popular and lighter-touch alternative to a main listing, and the impending launch of IPSX later this year (a regulated stock exchange commercial property) is expected to fuel more listings as a real alternative to traditional property investment models.
Investor opinion is likely to be heavily influenced by the small print. Once published, the extent of the alignment between UK and overseas investment will become apparent and investors will be able to fully assess the commercial impact of the reforms. In the meantime, investors should consider the potential impact of major changes to their businesses, and act with a degree of caution in making key investment decisions.
Our real estate team has the expertise to assess how the reforms might affect your business and help you navigate the changing landscape.
If you would like to discuss this further with us, please contact Sarah Gatehouse.