From April 2019, non-UK investors will be taxed on gains from investing in UK land. Currently only closely held residential land is caught, but this will be extended to sales of UK land or ‘property-rich’ vehicles (deriving at least 75% of their value from UK real estate). The tax rate will be the same as for UK investors: 19% for corporates, 20% on commercial property or 28% (on residential property) for non-corporates.
Some measures will soften the blow slightly:
- Tax will only be payable on gains attributable to value changes from April 2019, requiring property (or share) valuations from that date.
- Investors (and connected persons) who have held less than a 25% interest in a property-rich vehicle (other than a fund) over the past two years will escape the charge, on the basis that they may not know whether the vehicle is property rich.
- There will be an exemption for sale of interests in entities carrying on property-rich trades, such as retail and hotel chains or utility firms.
The government underestimated the rules’ impact on tax-exempt investors (such as pension funds) and offshore funds but now recognises that exempt investors should be no worse off than if they had invested directly in land, and that no double taxation should arise where sales are made by a fund and the proceeds passed to investors.
The government’s neat solution is to allow funds to be treated as transparent or exempt for capital gains purposes, allowing gains to be taxed at the investor rather than fund level, with the result that those gains may not be taxed at either level in the case of tax-exempt investors.’
The new rules reflect a desire to create a level playing field for UK and offshore investors (and, no doubt, generate more tax revenue) and bring the UK into line with most other major countries. But by reducing net returns they will make the UK less attractive for overseas investment – a real concern for the sector, given the importance of foreign investment to UK commercial property. The timing is unfortunate when coupled with Brexit uncertainty and the application (from April 2020) of corporation tax rules to non-resident investors’ rental income.
I believe the government should have used this opportunity to encourage investors to move their property from offshore structures into the UK. It could have done this by creating a more lightly regulated, tax-transparent UK fund vehicle and granting stamp duty land tax seeding relief to encourage onshoring to the UK. Instead, the rules are likely to result in increased use of offshore vehicles such as Jersey property units trust (JPUTs).
But I suspect the SDLT advantage of investing in UK land through an offshore structure will be removed in the next few years – a logical next step for a government seeking to level the UK and offshore playing field and generate more tax revenue.
Caspar Fox is partner at Reed Smith
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