Policy paper

Capital Gains Tax and Corporation Tax on gains for non-residents on UK property

Published 6 July 2018

Who is likely to be affected

Non-UK residents disposing of UK land, or of interests in entities holding UK land.

General description of the measure

This measure extends the scope of the UK’s taxation of gains accruing to non-UK residents to include gains on disposals of interests in non-residential UK property. It also extends the charge on gains on disposals of interests in residential property to diversely held companies, those widely held funds not previously included, and to life assurance companies. The measure also taxes non-UK residents’ gains on interests in UK property rich entities (for example, selling shares in a company that derives 75% or more of its value from UK land).

Policy objective

This measure levels the playing field between UK residents and non-UK residents on disposals of UK immovable property.

Background to the measure

This measure was announced at Autumn Budget 2017 and a consultation ran from 22 November 2017 to 16 February 2018 under the title, ‘Taxing gains made by non-residents on UK immovable property’. HMRC and HM Treasury continue to correspond with respondents.

The draft legislation and a response document were published on 6 July 2018. This will be followed by a period of technical consultation before the legislation is finalised for Budget 2018.

Detailed proposal

Operative date

The measure will have effect for disposals made on or after 6 April 2019.

An anti-forestalling rule detailed in a technical note published at Autumn Budget 2017 has effect for arrangements entered into on or after 22 November 2017. The targeted anti-avoidance rule in Chapter 4 of the new Schedule 1A relating to indirect disposals will have effect for arrangements entered into on or after 6 July 2018.

Current law

Part 1 of the Taxation of Chargeable Gains Act 1992 (TCGA) contains the main charging provisions for the taxation of capital gains. Persons other than companies are normally chargeable to Capital Gains Tax. Companies are chargeable to Corporation Tax on gains under section 2 of the Corporation Tax Act 2009 (CTA 2009). Section 5 of CTA 2009 deals with the territorial scope of Corporation Tax.

Sections 1 and 2B of TCGA, and section 2(2A)(a) of CTA 2009, provide that gains accruing on the disposal of UK residential property that has been subject to the Annual Tax on Enveloped Dwellings (ATED) are chargeable to Capital Gains Tax (ATED-related Capital Gains Tax). The amount of chargeable gain is determined by Schedule 4ZZA.

Sections 1 and 14B to 14H of TCGA provide that non-UK resident individuals, trustees, personal representatives of deceased persons and closely-held companies are chargeable to Capital Gains Tax (non-resident Capital Gains Tax) on disposals of UK residential property interests. The amount of chargeable gain is determined by Schedule 4ZZB. Diversely held companies, certain widely marketed funds, and life assurance companies may elect out of the charge.

The Taxes Management Act 1970 (TMA 1970) contains provisions for reporting and payment of tax. Section 59B sets out when any Capital Gains Tax due for a year of assessment is payable. Sections 12ZA to 12ZN set out when a non-resident is required to make a return reporting a disposal of a UK residential property interest. Section 59AA of TMA 1970 makes provision for payments on account of non-resident Capital Gains Tax liabilities.

Proposed revisions

Legislation will be introduced in Finance Bill 2018-19.

Part 1, and Chapters 5, 6, and 7 of Part 2, of TCGA will be re-written to accommodate the taxation of non-UK resident persons making disposals of interest in UK land, and simplify the alignment of the new and existing rules. Apart from the changes to implement this measure the draft is a re-statement of the existing law and makes no change to the way the existing provisions work. Appropriate changes will be made to CTA 2009 in parallel to include non- UK resident companies.

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 under the new section 1A(3)(b). The elections for the non-resident Capital Gains Tax rules not to apply for certain persons will be removed. UK land will be defined for this measure, using existing definitions. The definition of residential land will be in a new section 1C, and will follow existing definitions under the Taxes Acts.

All non- UK resident persons will also be taxable on indirect disposals of UK land under the new section 1A(3)(c). The 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. 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. The indirect disposal rules will be incorporated in a new Schedule 1A to TCGA.

The 75% property richness test will look at the gross assets of the entity being disposed of. Where a number of entities are disposed of in one arrangement, their assets will be aggregated to establish whether the 75% test is met. Any assets that are the counterpart to a liability in another entity in the arrangement will not be included – for example an intra-group loan credit balance in an entity would not be considered where the debtor is disposed of in the same arrangement.

As an example, a holding company is sold with no other assets apart from one 100% subsidiary with £1 million of UK land, and another with £1 million of plant and machinery. The proportion of UK land in the holding company’s gross asset value is 50%, based on aggregating its assets and those of the subsidiaries.

The 25% ownership test will look for situations where the person holds at the date of disposal, or has held within 2 years prior to disposal, a 25% or more interest in the property rich company. This holding may be directly, or through a series of other entities. Interests in the entity held by certain persons connected with the person making the disposal will be aggregated in establishing whether the 25% threshold is met. This will use a modified version of the tests in section 286 of TCGA, but subsections (2) and (8) would be limited to direct lineal ancestors and descendants of the person or their spouse or civil partner, and subsection (4) relating to partners would not apply. The 25% exemption will not be available for collective investment vehicles investing in UK real estate, with the definition to be decided in further consultation.

Interests in entities will be established through shareholdings, partnership interests, or interests in settled property, modelled on the tracing provisions in section 356OR of CTA 2010.

There will be a trading exemption so that disposals of interests in property rich entities that are trading before and after the disposal will not be chargeable disposals where the land is used in the trade. This is likely to apply where, for example, a non- UK resident disposes of shares in a retailer which owns a significant value of shops.

The normal anti-avoidance rules for capital gains will apply, and in addition there will be anti-avoidance rules to target the provisions for indirect disposals. The anti-forestalling rule, which commenced at 22 November 2017 and targets arrangements that use provisions of double tax treaties to escape the charge on non-UK residents, will be incorporated into the ongoing anti-avoidance provisions. There will be provisions to charge UK resident companies in the same group as a non- UK resident making the disposal who fails to pay the tax due.

All non- UK resident companies, including close companies, will be charged to Corporation Tax rather than Capital Gains Tax on their gains.

Existing reliefs and exemptions available for capital gains will be available to non-UK residents, with modifications where necessary. Those who are exempt from capital gains for reasons other than being non- UK resident will continue to be exempt.

Losses arising to non- UK resident companies under the new rules will be available in the same way as capital losses for UK resident companies. Capital Gains Tax losses will follow the existing rules for non-resident Capital Gains Tax losses.

There will be options to calculate the gain or loss on a disposal using the original acquisition cost of the asset or using the value of the asset at commencement of the rules in April 2019. Both options will be available for both direct and indirect disposals. Where the original cost basis is used to calculate an indirect disposal and this results in a loss it will not be an allowable loss. These will be incorporated in a new Schedule 4AA to TCGA.

Reporting requirements for non-UK residents in TMA 1970 will be replaced by a new Schedule to the Finance Act (as explained in the tax information and impact note Capital Gains Tax: Payment window for property gains) and expanded to include the further types of disposal under the new rules.

Special rules will apply to collective investment vehicles investing in UK real estate who agree to certain conditions including reporting to HMRC, these rules will look to address concerns raised in the consultation over taxation of exempt and similar investors and multiple tax charges on funds. These rules are being explored in consultation with relevant stakeholder groups. Regulations may be used to define the reporting requirements.

The provisions relating to ATED-related Capital Gains Tax will be abolished.

Summary of impacts

Exchequer impact (£m)

2018 to 2019	2019 to 2020	2020 to 2021	2021 to 2022	2022 to 2023	2023 to 2024

The impacts of this measure were set out in Table 2.1 in Autumn Budget 2017 when the policy was announced. Revisions to the impact of the measure in light of changes made through the consultation process will be subject to scrutiny by the Office for Budget Responsibility and will be set out at Budget 2018.

Economic impact

This measure is not expected to have any significant macroeconomic impacts.

Behavioural adjustments have been made to take account of changes in disposals of affected properties, as well as tax planning activity by affected tax payers.

Impact on individuals, households and families

This proposal is expected to affect:

• non-resident individuals and trusts, who will pay Capital Gains Tax for direct disposals of UK non-residential property for the first time
• non-resident individuals and trusts, who will pay Capital Gains Tax on gains for indirect disposals (via an envelope, for example at share level) for the first time

These individuals and trusts are expected to incur one-off costs of familiarisation with the new rules, valuation of property, registering for Capital Gains Tax and setting up all the systems and processes needed in order to calculate and pay Capital Gains Tax. On-going costs include keeping records of disposals, calculating the amount of tax due, filing and paying the tax, and notifying HMRC of transactions. It is expected that these impacts on individuals affected will be significant. Guidance will be published by the end of 2018 to support these changes.

The measure is not expected to impact on family formation, stability or breakdown.

Equalities impacts

It is not anticipated that there will be any particular impacts on groups sharing protected characteristics.

Impact on business including civil society organisations

This measure is expected to affect:

• non-resident businesses who will pay Corporation Tax or Capital Gains Tax on gains for direct disposals of UK immovable property
• non-resident businesses who will pay Corporation Tax or Capital Gains Tax on gains for indirect disposals (via an envelope, for example at share level)

These businesses are expected to incur one-off costs of familiarisation with the new rules, valuation of property, registering for UK tax and setting up all the systems and processes needed in order to calculate and pay the tax. On-going costs include keeping records of disposals, calculating the amount of tax due, online filing, and reporting and paying the tax to HMRC. Those in the advisory profession will also incur costs familiarising themselves with the new rules. It is expected that the impact on businesses will be significant and the overall impact will depend on how many businesses are brought within the scope of Corporation Tax and Capital Gains Tax for the first time following introduction of this measure. Guidance will be published by the end of 2018 to support these changes.

The consultation has identified a particular impact on offshore funds investing in the UK real estate sector. The impact will be assessed with further consultation with relevant stakeholder groups.

Operational impact (£m) (HMRC or other)

There are anticipated to be both IT and operational impacts from this proposal for HMRC, and these have been estimated to be in the region of £2.5 million per annum.

The need for reporting mechanisms for offshore funds may increase this cost, and this is being explored in further consultation with relevant stakeholder groups.

Other impacts

Other impacts have been considered and none have been identified.

Monitoring and evaluation

The measure will be kept under review through communication with affected taxpayer groups.

Further advice

If you have any questions about this change, please contact James Konya on telephone: 03000 544525 or email: [email protected].