Introduction

This note summarises some recent changes to the UK taxation of non-UK resident companies owning UK residential property. It does not cover the non-resident landlord scheme, nor general anti-avoidance in relation to gains made from UK land. The areas covered are:

  • capital gains tax changes from 6 April 2015;
  • changes to thresholds for the annual tax on enveloped dwellings;
  • changes to stamp duty land tax rates;
  • changes to the incidence of UK inheritance tax for non-UK domiciled individuals holding UK residential property indirectly;
  • changes to the tax treatment of non-UK residents making profits from trading in and developing UK land.

Capital gains tax charges from 6 April 2015

A charge to corporation tax applies to disposals of residential property in the UK by non-UK resident companies from 6 April 2015. This mirrors the similar changes to capital gains tax (CGT) for non-corporates from that date.

The tax charge applies to gains realised on property used or suitable for use as a dwelling, including property being constructed or adapted for use as a dwelling. Disposals of trading stock continue to be subject to tax on profits, where the trade is operated through the UK, as previously.

Larger scale institutional investment companies will not be caught by these new provisions but a new 'narrowly controlled' test has been introduced so that smaller private investment vehicles will be subject to the charge. Essentially any non-resident company controlled by five or fewer individuals or companies (including connected parties and with aggregation of close family members' interests), which are themselves narrowly controlled (unless one of those individuals is a 'qualified institutional investor'), is within the scope of the charge.

Only gains arising after 5 April 2015 are subject to the new CGT charge as a result of a 're- basing' of the property at its market value at that date. There is an option to time apportion the gain over the whole period of ownership so that only the post 6 April 2015 pro rata element of the gain is taxed (although not if the disposal is also subject to ATED-related CGT – see below), or, alternatively, the gain or loss can be computed over the whole ownership period.

The rate of tax applied to the gain is currently at the same rate as UK corporation tax (20%). While the corporation tax rate will fall to 19% from 1 April 2017 and 17% from 1 April 2020, gains on UK residential properties made by non-UK resident companies will continue to be taxed at 20% rather than at the corporation tax rate. The 20% rate of capital gains tax on disposals of UK residential property for a non-UK resident company compares favourably with the 28% top rate that applies to gains on such property held directly by non-UK resident individuals.

Subject to some recently introduced exceptions, any non-resident company disposing of UK residential property must notify HM Revenue & Customs (HMRC) within thirty days of completion of the sale that the disposal has occurred by filing an NRCGT return.

If the company does not have an established relationship with HMRC (ie a live self- assessment record or within ATED for the previous period) the gain or loss must be reported, with any reliefs claimed, and the tax has to be paid within the same thirty day period.

Companies with an established relationship will still have to file an NRCGT return within the 30 day time limit, but will be able to include the disposal in their self assessment return and pay the tax within the usual self assessment timescales.

The circumstances when a non-UK resident company will not need to file an NRCGT return are:

  • where the tax rules provide that the disposal is at no gain/no loss; or
  • where the disposal is a grant of a lease for no premium to an unconnected person under a bargain made at arm's length.

However the company can nevertheless elect to file an NRCGT return in these circumstances.

Losses on disposal of UK residential property are ring-fenced for use against gains on such properties by the same non-UK resident company in the same tax year or carried forward to later years. Companies are able to benefit from a form of indexation allowance and, for companies in a group, a limited form of pooling where gains and losses on disposals of UK residential property can be offset by different members of the same group. Clear evidence of group membership will need to be supplied to HMRC. A 'de-pooling charge' will arise when companies leave the group, with there being a deemed disposal of UK residential property held by that company.

As noted below, where ATED-related CGT applies to any part of the gain, that part is not then subject to CGT. Where ATED-related CGT, or the CGT charge outlined above, applies directly to any part of a gain, that part of the gain is not also attributed to shareholders under various existing anti-avoidance provisions.

Changes to annual tax on enveloped dwellings (ATED) thresholds

The ATED charge initially applied to UK residential properties held in corporate and similar structures if worth more than £2m in April 2012, or at acquisition if later.

The ATED charge was extended to such properties worth more than £1m from April 2015 and now applies to those worth more than £500,000 from April 2016. In both cases the valuation for ATED purposes is that at 1 April 2012, or at acquisition if later. The new charges are set at £7,000 and £3,500 per annum for properties in these two bands. ATED returns (including claims for reliefs) for properties newly within the charge from 1 April 2016 as a result of the £500,000 threshold will need to be filed by 30 April 2016 along with any ATED payment due.

ATED charges for properties worth more than £2m have increased significantly from 1 April 2015 with charges ranging from £23,350 to £218,200 for those over £20m. These rates have not increased for the 2016/17 ATED year. Some companies may wish to give further consideration to 'de-enveloping' the properties as a result of these increases. Companies should note that 1 April 2017 is a new valuation date for ATED purposes, and this will form the basis for ATED charges for the five ATED years commencing on April 2018.

There are various reliefs from paying ATED, for example, where the UK residential property is let on a commercial basis to third parties. Such relief has to be claimed on an annual basis, but there is now a single annual return for all properties subject to the same relief with there being no requirement to file returns for any changes in such properties during the year.

Interaction of ATED- related CGT charge and the new non-resident CGT charge

Where ATED is payable in respect of a UK residential property then there is also an ATED- related CGT charge when the property is sold. Where the property is subject to both the new CGT charge detailed above and the ATED-related CGT charge, the ATED-related CGT charge (28%) will take precedence. This will mean that changes in use of properties, over their period of ownership, will need to be considered so that gains/loss can be allocated correctly between the two regimes.

Stamp Duty Land Tax (SDLT)

SDLT charges are paid on the acquisition of a UK property. As a result of changes introduced with effect from 1 April 2016 the rates for acquisitions of UK single dwelling interests where the acquirer does not already own another residential property are lower than applies where there is already an existing property owned. The rates are charged according to the consideration falling within the relevant band.

However, where a company (or other 'non-natural' person) acquires UK residential property interest with a value at acquisition exceeding £500,000, the rate of SDLT on the whole consideration can be 15% unless a relief applies. Reliefs from the 15% rate on the whole consideration are available for most businesses uses.

Inheritance tax issues for non-UK domiciled individuals

From 6 April 2017 all UK residential property held indirectly by individuals via non-UK structures will be brought within the charge to UK inheritance tax (IHT) applying to non-UK domiciled individuals. It will no longer be possible to shelter such property from IHT by holding it either in a non-UK company, or by placing a non-UK trust above a non-UK company. This will apply to all UK residential properties, regardless of whether they are let commercially, but will not impact upon diversely-held non-UK companies.

Further details as to how this IHT charge will apply are still awaited, in particular whether any loans financing the properties will be deductible. Given this change and the now substantial ATED charges applying where properties do not qualify for an ATED relief, consideration should be given to the costs and benefits of de-enveloping UK residential property currently held in this way.

Non-UK residents and profits from trading in and developing UK land

With effect from 16 March 2016 changes were made to certain double tax treaties and new UK legislation will apply so that non-UK resident developers of UK property will always be brought into charge to UK tax on the profits from that development. The UK legislation will only be available from the report stage for Finance Bill 2016, but the changes being introduced to the treaties between the UK and Jersey, Guernsey and Isle of Man are already available at https://www.gov.uk/government/publications/profits-from-trading-in-and-developing-uk-land.

The financial Conduct Authority does not regulate all of the services or products discussed in this publication.