This will affect overseas property investors and institutional funds:
Capital gains acquired from commercial land and buildings owned by non-UK residents and not used for the purposes of a UK trade are currently outside the scope of UK tax. Last month the UK Budget announced that gains on all UK real property will be taxable. The proposals will also apply to disposals of shares or other interests in 'property rich' companies, partnerships or other entities. There will be prevention of the new rules applying to indirect disposals by residents of some countries by using double tax treaties.
Formerly, assets owned by non-UK residents and are not used for the purposes of a UK trade are outside the scope of UK capital gains tax which has been one of the fundamental principles of the UK tax system.
This has been attractive to overseas investors and UK institutional funds looking for a transparent holding structure and has been the underpinning of the structure of the substantial flows into UK real property over past decades.
With the Budget announcement that gains on all UK real property will be taxable from April 2019, this structure has been demolished. All gains from the disposal of holdings in 'property rich' companies, partnerships and other entities will be included.
However, some double tax treaties will prevent the charge applying to some non-residents in existing structures and stop them being caught by the rules for disposals of interests in 'property rich' entities. An anti-forestalling provision, however, will prevent post-Budget structuring taking advantage of favourable treaties.
What is the current regime?
Commercial property owned by Non-UK residents that is not used for the purposes of a UK trade is not currently subject to UK tax on property disposals. Therefore a company or a fund, which owns UK commercial property as an investment is also not usually subject to UK tax if they dispose of an interest in an entity. In 2016, the Transactions in Land (TIL) rules introduced brought trading profits and certain gains on disposal of property and interests in property holding vehicles within the scope of UK tax where the property was acquired or developed with the main purpose of realising a gain.
However, for UK residential property there is a different position:
A charge was introduced in 2015 for the disposal of UK residential property (the Non-Resident Capital Gains Tax or NRCGT) owned by a non-resident. This charge does not apply to non-resident companies that would, if they were UK resident, not be close companies; and
Where there is a disposal of UK residential property that has been subject to the Annual Tax on Enveloped Dwellings (ATED) there is also a tax charge.
Current charges do not apply where the non-resident disposes of an interest in an entity, such as a company or fund, which owns UK residential property. It is only where the non-resident makes a direct disposal of the property when both these current charges apply
Sean White - Partner at Courtyard Solicitors in Wimbledon & Totnes Devon said "This change may well deter some foreign investors from purchasing property as they may be in jurisdictions where they would not pay tax on the increase in value of properties which they own in the UK."