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Tightening the commercial property tax net

Tightening the commercial property tax net

New rules due in 2019 reflect HMRC’s stricter stance on UK property ownership by non-resident individuals and entities.

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Over the past few years, HMRC has been bringing offshore ownership of UK property increasingly into the tax net, essentially exercising its full taxing rights over UK assets. 

Given the political agenda surrounding tax avoidance, property matters and offshore investments these issues are all in the spotlight. 

As a result, fiscal policy is becoming progressively less lenient towards overseas ownership of UK property.  

Legislation changes in 2015 brought UK residential property owned by non-UK residents into the capital gains tax (NRCGT) net and residential property held by certain foreign entities came into the inheritance tax realm from 6 April 2017.

New rule changes

In the latest development, the 2015 legislation extends to commercial property from 2019. 

From 6 April 2019, gains made on the disposal of UK commercial property by non-resident individuals will be liable for capital gains tax (CGT) at a rate of 20% and from 1 April 2019 foreign entities will be liable for corporation tax on the disposal of commercial property (which will fall to 17% by 2020). 

The new rules also cover what is known as indirect disposals: selling shares in a company that owns UK commercial property. For an indirect interest to be caught under these rules the entity must be ‘property rich’.

‘Property rich’ is defined as deriving 75% or more of asset value from UK commercial property.  In addition the investor making the disposal, needs to own 25% or more of the company’s shares, or have done during the previous five years.

The legislation applies to both closely held companies (where five or less people have control) as well as widely held entities which is a change from the 2015 legislation which only targeted closely held companies.  

Rollover relief may be available to defer CGT on certain assets, if they are replaced with new business assets.

For the purposes of these new rules, rebasing will apply and the value of properties will be taken at 1 April 2019 for entities liable to corporation tax and 6 April 2019 for individuals and trustees.  

Implications

The change in regulation addresses what can be described as an anomaly. Owning UK commercial property is currently more tax-beneficial for non-resident individuals and entities than those resident in the UK, who are already liable for these taxes.

HMRC’s increasingly stringent stance leads us to expect more widening of the UK tax net in relation to UK property. There has been speculation that commercial property may become liable for inheritance tax in the near future, in the same way residential property has been brought into the IHT net. 

The finer details of the new rules are yet to be published by HMRC. However, it will be worth considering whether it is appropriate to migrate property-rich corporate entities to the UK.

The benefits of keeping property rich entities offshore will be greatly reduced and we expect to see an increasing number of companies setting up in the UK, taking advantage of our competitive corporation tax regime. The Government will no doubt see this as a welcome outcome from the new legislation.  

Non UK domiciled individuals may currently own UK commercial property through non-UK companies and trust structures. Given these changes and the recent changes affecting the taxation of non-domiciles, some of these structures may no longer be fit for purpose. Anyone with such a structure should be reviewing the impact of these rules and their options.

The new rules are complex, as are their implications. Professional tax advice can help you review your UK property investments in light of the changes. KPMG can advise on how best to structure UK commercial property assets, and assist where appropriate, in making alterations to existing structures.

Find out more

You can read more about these changes on the KPMG and HMRC’s websites:

If you would like further advice, please contact our tax advisers Greg Limb or Paul Day

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