Policy paper

Capital Gains Tax and Corporation Tax: taxing gains made by non-residents on UK immovable property

Updated 7 November 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’.

The draft legislation on the core provisions and a response document were published on 6 July 2018. This was followed by a period of technical consultation before the legislation was finalised for Budget 2018. During the consultation period HMRC and HM Treasury worked with industry on provisions applying specifically to collective investment vehicles investing in UK land, which were then published at Budget 2018.

This tax information and impact note supersedes the note published in on 6 July 2018 alongside the draft of the core provisions.

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. Section 5 of Corporation Tax Act 2009 deals with the territorial scope of Corporation Tax.

Sections 1 and 2B of TCGA, and section 2(2A)(a) of Corporation Tax Act 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 to TCGA.

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 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 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 Taxes Management Act 1970 makes provision for payments on account of non-resident Capital Gains Tax liabilities.

Companies meeting the conditions to be a UK Real Estate Investment Trust in Chapter 2 of Part 12 of Corporation Tax Act 2010 are exempt under section 535 of that Act on gains on their disposals of property used within the property rental business.

Proposed revisions

Legislation will be introduced in Finance Bill 2018-19.

Part 1, and Chapters 5, 6, and 7 of Part 2, of TCGA are 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 provisions are a re-statement of the existing law and make no change to the way the existing provisions work. Appropriate changes are made to Corporation Tax Act 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. The elections for the non-resident Capital Gains Tax rules not to apply for certain persons have been removed. UK land is defined for this measure using existing definitions. The definition of an interest in UK land is in a new section 1C, and follows existing definitions under the Taxes Acts. Residential property gains are defined in a new Schedule 1B.

All non-UK resident persons will also be taxable on indirect disposals of UK. 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 are 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 other than land 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 £1m of UK land, and another with £1m 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 two 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 will not apply. The 25% ownership exemption on an indirect disposal under Schedule 1A will not be available for those non-residents investing in UK property rich collective investment vehicles.

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 resident, 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 Taxes Management Act 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.

The new Schedule 5AAA will provide for how the rules apply to Collective Investment Schemes, under the meaning in section 235 of the Financial Services and Markets Act 2000, and Alternative Investment Funds, as in regulation 3 of the Alternative Investment Fund Managers Regulations 2013 (SI 2013/1773).

These funds, other than partnerships, will be treated for the purposes of TCGA as if they were companies and so chargeable to Corporation Tax. An investment in such a fund will be treated as if the interests of the investors were shares in a company, so that where the fund is UK property rich, a disposal of an interest in it by a non-UK resident investor will be chargeable to UK tax under the provisions in the new Schedule 1A.

Other rules specific to funds are detailed in a Technical Note published on 7 November 2018, including the transparency and exemption elections.

Where a UK Real Estate Investment Trust within Chapter 12 of the Corporation Tax Act 2012 is UK property rich, its gains on disposals of UK property rich entities will be exempted under the same mechanism as disposals of property under the existing section 535 of that Act.

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
+5	+10	+20	+55	+75	+105

These figures are set out in Table 2.2 of Budget 2018. The costing changes since the original August 2017 announcement, which were certified by the Office for Budget Responsibility (OBR) at Autumn Budget 2017, are primarily driven by revisions to the OBR’s property price forecast and also reflect changes that were made post-consultation. More details can be found in the policy costings document published alongside Autumn Budget 2017.

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 significant impact on offshore funds investing in the UK real estate sector. The policy seeks to mitigate this impact by allowing options to simplify the tax treatment and ensure there are no unintended consequences. Otherwise the impacts on this sector is as above.

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.

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 contact James Konya on telephone: 03000 544 525 or email: [email protected].