Political manifestos, property related issues for non-residents
In this episode we will be talking about property related issues for non-residences. In addition we will also provide a roundup of recent tax changes, this time covering: Tax proposals in political party manifestos and the Higgins v HMRC case.
One of the reasons we wanted to talk about the recent property tax changes is because they have such a wide impact – when you make changes to the way property is taxed, it impacts homeowners, investors, funds, companies and other categories. It’s also an area that has changed a lot in recent years.
But today one area we are going to focus on the expansion of Non-Resident Capital Gains Tax (or NRCGT). These rules were originally introduced in 2015 and when they came in it effectively meant that all non-residents were taxed on disposals of UK residential property. And now, well from April this year, there is an extension to include commercial property.
[01.28] Non-Resident Capital Gains Tax and Corporation Tax
- All UK-situated real property, including commercial property, owned by non-UK residents has been brought into UK tax from 6 April 2019.
- The new regime also extends the rules to ‘indirect disposals’ and this could apply where a non-resident sells shares in a company or collective investment vehicle that owns UK property. The rules are very detailed.
- There is an important trading exemption for indirect disposals.
- There is also rebasing, which means that only the increase in value from the rebasing date is subject to CGT.
- There can also be relief under a double tax treaty, not all treaties allow the UK to tax indirect disposals so it’s important to check the terms of the specific treaty.
- Non-resident companies will be subject to corporation tax on gains on disposals of UK property. Individuals and trustees will be liable to CGT.
- As well as the rates being different, the compliance differs between corporates and individuals/trustees. In particular, for individuals/trustees a return needs to be filed within 30 days of completion to report the disposal, regardless of whether or not there is any tax to pay.
- It is really important that non-residents are aware of these new rules and do meet the reporting requirements as penalties maybe applied for late reporting.
- There are a specific subset of rules that apply to collective investment vehicles (CIVs) and there are two elections that some CIVs may be able to make to move the taxing point of the disposal to the investors.
- We are concerned that disposals of UK property rich entities, especially CIVs, may not always be obvious and the reporting deadline may therefore easily be missed. Non-residents who have investment portfolios may want to liaise with their investment manager to ask for confirmation on whether they hold any investments that may be subject to these rules.
[17.33] Non-resident Landlords
Non-UK resident companies that carry on a UK property business will be chargeable to corporation tax from April 2020, not income tax. This will transform the way Non-resident Landlords handle their UK tax affairs.
The most significant change will be the way in which relief for interest expenses and finance charges is given. In addition to transfer pricing adjustments, there could now be restrictions under the anti-hybrid mismatch rules and corporate interest restriction provisions. This could result in a significant reduction in the level of interest that is deductible, particularly for highly leveraged companies or where there are large shareholder loans. There will also be a much heavier compliance burden under the corporation tax regime.
What should business be doing about these changes now?
- Review how funding is structured and whether certain loans should be capitalised
- Review how entities and financial instruments involving the non-resident company are taxed in each jurisdiction
- Where significant losses of £5m or more are forecast, an analysis should be undertaken to see when these losses are likely to arise and if their use is likely to be restricted.
There are also many transitional rules to consider on filing and administration, which adds further complication. Companies will also need to budget for the additional compliance costs associated with the transition. One fundamental difference is the requirement prepare accounts in IXBRL tagged format to e-file with the corporate tax return within 12 months of the end of the accounting period.
[25.15] Tax proposals in political party manifestos
[26.22] Higgins vs HMRC
- This is a Court of Appeal decision on a private residence relief (PRR) case.
- The taxpayer bought a flat that had yet to be built and as a result, he exchanged on the property over 3 years before completing.
- The case considered whether his period of ownership for PRR purposes started at exchange or completion.
- The Court of Appeal found that it started from completion, overturning the previous Upper Tribunal decision.
- This was a good result for the taxpayer as it meant no capital gains tax was payable on sale.
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This episode was recorded on 28/08/2019
This S&W The Pulse podcast is of a general nature and is not a substitute for professional advice. No responsibility can be accepted for the consequences of any action taken or refrained from as a result of what is said. The views expressed are not necessarily those of the presenter or of Smith & Williamson or any of its affiliates. No reproduction of this podcast may be made in whole or in part for professional or recreational purposes. No action should be taken based on this podcast and we accept no liability if we change your views on any of the subjects mentioned.
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The Pulse from Smith & Williamson
Political manifestos, property related issues for non-residences
Broadcast on Smith & Williamson at 09:00, 26th of NOVEMBER 2019
Available online from 10:00 on the same day .
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