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The Budget 2018: Extension of taxation of gains to non-UK residents holding direct and indirect interests in UK land

The Budget 2018: Extension of taxation of gains to non-UK residents holding direct and indirect interests in UK land
  • United Kingdom
  • Tax planning and consultancy - Budget


The government has published a policy paper updating the position on the proposed extension of CGT to direct and indirect holdings of UK real estate by non-residents from 6 April 2019, and the material on funds will be expanded shortly. The paper provides an update to their summary of responses to the original consultations, which was published on 6 July 2018.

Broadly, the main rules are as previously published.

Directly-held real estate of non-UK residents will become subject to capital gains tax or corporation tax on chargeable gains (if a company) in relation to gains from 6 April 2019 on disposals from that date. This change applies to all UK real estate, both commercial and residential. Those who are currently exempt from UK taxation on capital gains – such as most offshore pension funds, and sovereign wealth funds - will continue to be exempt. There will also be an exemption for properties held for the purposes of a trade carried on before and after the disposal, such as a shop. The current exemption for “widely-held” vehicles under the current non-resident CGT (NR CGT) on residential property will, however, be abolished, but not retrospectively.

In relation to UK real estate held indirectly through offshore vehicles, the provisions fall, broadly, into two categories: (i) the general rules for indirect holdings (other than in partnerships, which are transparent for gains); and (ii) those rules as varied applying to collective investment schemes including alternative investment funds. The second category is not covered in detail in the paper and has been subject to extensive consultation between industry bodies and HM Revenue & Customs and HM Treasury. We are expecting the draft legislation resulting from this to be in the Finance Bill published on 7 November.

The basic rule for indirect holdings will be that investors are taxable on the disposal of their indirect interests in “property-rich vehicles” (i.e. a vehicle where 75% or more of the gross value of the interest disposed of is in UK land), if the investor (together with connected parties) has held a 25% or more interest within the past two years (this is a reduction to the previous five-year period suggested last year). There will be tracing down through structures to assess this. In determining the charge on disposals of interests in indirect entities, it will be the value of the interest disposed of – not that of the underlying real estate - that will be relevant. Accordingly, anti-avoidance rules will apply to prevent, for example, tax being avoided by having a related-party loan credit in the structure, which would otherwise mean that the 75% value in UK land requirement is not met. There will be options to rebase to April 2019 or to retain the original cost in determining the gain, but, an original base cost election will not be allowed to produce an allowable loss. In determining the test, the usual CGT connection definition will be cut down so as, for example, only to cover lineal dependents, and partnerships will be able to be looked through.

It is expected, however, that the default position for collective investment schemes including alternative investment funds which are property-rich will be as for (i), but they should be able to elect for one of two alternative regimes, depending on various conditions being met. These are tax-transparency, like a partnership, or an exemption, so in either case the only charge should be on disposals of their investments by investors. Importantly, the exemption for holdings below 25% will not apply to investors in funds, so all disposals by investors in funds which are UK property-rich will fall within the extended CGT net.

In computing the charge, reliefs available to UK investors, such as corporation tax group relief, and the annual exemption for individuals, should, however, be available for non-resident investors.

Alongside this change, ATED is to be abolished and the existing CGT rules will be amended to take account of the new proposals – though it is not intended that the drafting changes do more than this. The new rules will incorporate the NR CGT 30 day filing period and further shorter periods for the payment of tax.

Anti-avoidance and anti-forestalling rules have already been introduced, and there are likely to be further targeted anti-avoidance rules for funds.

Please view our dedicated Budget 2018 hub here. It will give you access to our watch list, our contributors and relevant articles and tweets.

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