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Non-UK property companies: draft legislation brings profits within corporation tax

Non-UK resident companies carrying on a UK property business will be subject to corporation tax on their income from April 2020 and capital gains derived from UK commercial property will be subject to UK tax from April 2019, draft legislation published last week confirms.10 Jul 2018

"The legislation levels the playing field between UK and non-UK resident property companies as regards tax on UK property income and associated finance costs and derivatives," said Richard Croker, a property tax expert at Pinsent Masons, the law firm behind Out-Law.com.

Under current rules, non-UK resident companies with UK property income are subject to income tax, rather than corporation tax.  

"The exchequer impact of the income tax to corporation tax change is estimated to be negative in its first year of operation; probably due to the proposed reduction in the corporation tax rate to 17% from 1st April 2020 which was first announced in 2016, and notwithstanding the more restrictive interest relief regime which will apply as a result of the move from income to corporation tax. If the rate change is foregone or deferred, as some have suggested given the government’s recent commitment to increase NHS funding, the position may well be different," Richard Croker said.

Transitional rules will allow accumulated losses for income tax and existing capital allowance positions to be carried forward. Non residents currently completing paper income tax returns will be expected to file online corporation tax returns for accounting periods ending after 6 April 2020.

Non-UK resident companies are not currently subject to UK tax on capital gains made from UK commercial property.

From April 2019 gains made by non resident companies on non-residential UK property will be brought within the scope of UK tax. At present gains made by non resident companies in relation to disposals of interests in residential property are subject to UK tax , but diversely held companies, some widely held funds and life assurance companies can elect out of the charge.  The new rules extend the charge on gains on disposals of interests in residential property to these entities and mean that all non-UK resident persons, whether liable to capital gains tax or corporation tax, will be taxable on gains on disposals of interests in any type of UK land, whether residential or non-residential.

The changes will also tax non-UK residents’ gains on interests in UK 'property rich' entities. These indirect disposal rules will apply where a person makes a disposal of an entity that derives 75% or more of its gross asset value from UK land. This would catch for example, selling shares in a company that derives 75% or more of its value from UK land.

"HMRC has, however, proposed a welcome change to the original proposal on which they consulted, being an exemption from the indirect charge for gains made on the sale of shares in property-rich companies which use that property in the course of a trade, such as retailers," Croker said.

There will be an exemption for investors in such entities who hold a less than 25% interest.  The gains on indirect disposals will be calculated using the value of the asset being disposed of, rather than the value of the underlying UK land.

Only the gains attributable to changes in value from 1 April 2019 for companies or 6 April 2019 for other persons, will be subject to the new regime.

The CGT charge will be subject to the terms of any double tax treaty between the UK and the company of residence of the non-resident. Treaties usually allow capital gains from immoveable property to be taxed in the country in which the property is situated. Most, but not all of the UK's treaties allow the UK to tax gains on disposals of shares in UK property rich companies. Anti-forestalling arrangements apply from 22 November 2017, when the proposals were announced. These will prevent the restructuring of existing holdings or the structuring of new arrangements to take advantage of double tax treaties which do not allow the UK to tax the gains from direct or indirect holdings of UK property

"The property industry had serious concerns about how these changes would impact on UK pension schemes, which are significant investors in the UK commercial property market. As HMRC acknowledge in the response to consultation, pension funds usually invest using offshore collective investment vehicles, not to avoid tax, but to retain their tax-free gains status when investing through subsidiary entities. It is important that this measure does not cause them to suffer tax at the fund level," Croker said.

The government intends that income transparent offshore funds will be able to elect for transparency for the purpose of capital gains for non-UK resident investors only. Offshore funds that are not closely held, and which agree to reporting requirements, will be able to elect for gains by the fund or within its structure not to be taxable, but instead for the investor to be taxed on disposals of their interest in the fund.

"The scope of exemption will depend upon how the government defines 'closely held' and indications are that this will follow the rules for so-called private REITs, allowing entities controlled by institutional investors such as pension schemes to qualify," Richard Croker said.   

"It is the intention of government that officials continue to engage closely with industry on this extremely complex area, in order to establish whether the revised proposals create any unintended consequences in this area, and to provide a robust set of rules that addresses the issues appropriately," the consultation document response states.

In response to representations received that existing UK fund structures are not attractive to some institutional investors, on the grounds of their cost and administrative burden, the government also acknowledges a need to consider a "new, more lightly regulated UK fund" although this will be done separately from the further technical consultation on the legislation.

The consultation runs until 31 August 2018, with measures to be included in the next Finance Bill, which is expected to become law in early 2019.