Budget 2017: Investors' holding structures could be caught by new property tax rules, expert warns

The government intends that all capital gains on the disposal of UK land and property become subject to UK tax from April 2019, including sales of commercial property by offshore owners. From April 2020, it also intends to change the way in which non-resident companies' UK property income and certain gains are taxed, with these becoming subject to corporation tax rather than income or capital gains tax (CGT).

A consultation on the proposed changes, published alongside the Budget, runs until 16 February 2018. The government has also published anti-forestalling measures, which come into force immediately.

Property tax expert John Christian of Pinsent Masons, the law firm behind Out-Law.com, said that the changes, although "inevitable", would come as a shock to the UK commercial property industry.

"Offshore transactions involving UK residential property or trading transactions have been brought within the scope of UK tax in recent years," he said. "The UK's position in not taxing offshore gains on commercial property has long been significantly more generous than other jurisdictions."

"Non-UK investors will doubtless re-appraise their strategy for UK property to take account of the increased tax on exit. UK institutional investors will need to re-assess holding structures, as non-UK holding companies and unit trusts will cease to be tax transparent in relation to capital gains accruing after April 2019. There may be a move to structures such as REITs [real estate investment trusts], partnerships or UK exempt unit trusts, which could preserve tax transparency for institutional investors," he said.

Once in force, the new rules would bring all capital gains on UK commercial property owned or held by offshore individuals and companies within the scope of UK tax. The change will "align the UK with other countries and remove an advantage which non-residents have over UK residents", according to the Budget document.

The government intends to introduce targeted exemptions to the new rules for institutional investors, such as pension funds. It is seeking views as part of the consultation exercise on the best way to do this.

The consultation does not deal with the government's plans to bring non-resident companies that are currently liable for income tax and non-resident CGT into the corporation tax regime, as these will follow in a separate document due to be published shortly. However, these changes will be "consistent" with its plans to bring gains on disposal into UK tax, according to the consultation. The shift to corporation tax would take place in April 2020, according to the Budget document.

The government's intention is to "rationalise" the existing rules into a "unified approach to taxing non-residents' gains on disposals of interests in UK immoveable property" as far as is possible, taking into account any necessary distinctions between the treatment of residential and commercial property, according to the consultation.