The UK has one of the world’s most complex tax codes, clocking in at more than 10 million words. Earlier this month, another few thousand words were added when draft legislation for capital gains tax for non-residents on UK property was published.
Gains on any UK property arising after April 2019 will be chargeable to UK tax, as will gains arising to non-UK residents on sales of shares deriving their value from UK property, where certain conditions are met. At the same time, annual tax on enveloped dwellings (ATED)-related capital gains tax will be abolished.
The main winner from the new rules is HM Treasury, which has essentially acquired a new revenue source. Those involved in direct or indirect property disposals will suffer a loss in the form of tax charges or lower values of investments in property-holding vehicles. The aim is to put the UK on a level playing field with the way most other countries tax non-residents’ property gains. Importantly, it removes the competitive advantage non-UK residents have over resident investors by virtue of their tax status.
One area of uncertainty remains. When the proposals were first put forward, it was intended that tax-exempt investors, such as pension and sovereign wealth funds, should not be disadvantaged. But this aim has been hard to achieve, particularly due to the fact that many tax-exempt investors hold their UK property interests through investment funds. So consultation will continue to determine a special regime for widely held funds, to be brought in with the legislation in April 2019 – leaving little time to achieve this.
The absence of an effective exemption would equalise the position with UK pension funds that invest in property through UK corporates and that do not benefit from an exemption from tax suffered by the corporate entity. What is proposed is that a widely held offshore fund will ‘elect’ to be exempt from tax on property disposals to the extent that it is held by tax-exempt investors; the non-tax exempt investors’ share of any gain on a disposal of their investments would still be taxable. Even if such an exemption can be achieved, it is likely to be complex, with investors looking to UK REITs as an alternative structure for investment.
There are still many unknowns, but it is clear that as we strive for a fairer, simpler and more transparent tax system, there will be winners and losers. With just nine months before the new rules come into force, the clock is ticking for non-residents to fully understand the legislation’s financial and commercial impact.
Andrew Crossman is a tax partner at BDO