Capital Gains Tax. Discussion Forum Monday 22 nd January 2018

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Lizbeth Sims
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1 Capital Gains Tax Discussion Forum Monday 22 nd January 2018

2 Chair & Introduction John Cartwright Chief Executive, AREF

3 Chair & Speakers Cathryn Vanderspar Partner, Head of London Tax Eversheds Sutherland John Cartwright Chief Executive, AREF Leonie Webster Partner Deloitte LLP

4 Agenda Introduction Presentation by Cathryn Vanderspar Presentation by Leonie Webster Breakout session Conclusions and next steps

5 Taxing gains made by non-residents in UK immovable property AREF round table 22 January 2018 Cathryn Vanderspar Partner, Head of London Tax

6 What this session will cover What is it all about? Scope Background and position to date Aims The changes proposed Preliminary thoughts Interlinking proposed changes

7 Illustration of current position: offshore investment company structure: Example (1) Equity Non-UK investor Loans Dividends/ Interest Benefits Flexible Well known in UK No SD/ SDLT on share transfers Allowable deductions against income Dividend returns for investors: no wht No CGT on share disposals or direct disposals of commercial or widely-held residential property Offshore HoldCo Equity Loans Dividends/ Interest Issues Offshore management/ residence Cost NRCGT (exemptions for non-close and diversely marketed) Property Management Fees Offshore Propco Loan Interest Bank Rent (NRL) UK Property

8 Typical institutional offshore structure: Example (2) UK Pension Fund SWF Offshore pension fund JPUT SPV Assets Assets

9 The UK position on capital gains on non-residents investing in UK land to date (ignoring treaties) Date UK residents Non-residents: Residential Non-residents: Commercial Pre 1965 No CGT Until 2013 CGT and corporation tax on chargeable gains 2013 ATED CGT residential property only (exemptions for trading and rental businesses) No CGT unless trading in the UK through a UK PE ATED CGT (exemptions for trading and rental businesses) 2015 NRCGT (exemptions for non-close and diversely marketed entities) 2018 Regs on offshore funds (eg JPUTs and FCPs)? 2019 CGT charge on all direct disposals of UK land CGT charge on all disposals of UK land CGT charge on all disposals of UK land CGT on disposals of certain indirect disposals in property rich entities CGT on disposals of certain indirect disposals in property rich entities ATED CGT?

10 What is does the government want to do? Stated aims Level the playing field between onshore and offshore investors Make use of its existing treaty network Discourage use of offshore structures for tax avoidance Increase tax revenue in longer term Other: Politics Public opinion Paradise Papers? Bring entities onshore? Consideration to wider economic impact?

11 The key changes proposed Timing: 1 April 2019 (for companies), 6 April 2019 (for others) Direct investments Extend tax on gains from April 2019 to all disposals of UK immovable property (commercial and residential) held by nonresidents: widely held exemption from NRCGT to be abolished (ie for non-close and diversely marketed entities and life companies) Rebasing to April 2019 (with option for original cost) Exemptions where currently exempt or out of scope other than by reason of residence e.g. overseas pension schemes under s.271(1a) TCGA. Indirect investments New tax on gains on indirect disposals from April 2019 of interests in property rich entities if: entity is one where gross market value of interest in UK immovable property is 75%+ of entity value holding is or has been 25% or more in last 5 years (at some point) (Tracing down through indirect interests e.g. trusts and partnerships) (Related parties and those acting together count for 25% test) Residential and commercial UK property Rebasing to April no option proposed Treaty position acknowledged

12 Some other points mentioned Funds: UK investors pay tax on disposals of interests Non-residents now be taxable if large holding Some UK funds are exempt No plans to exempt large offshore funds Level playing field wanted BUT recognition of issues REIT: Offshore subsidiary within charge, but will become exempt under REIT rules Gains now PID, if distributed, with WHT (subject to treaty reclaims) Special rule: disaggregation for 10% rule will be treated as acting together for the CGT 25% ownership rule SSE: should be available if conditions are met for trading groups and property rich groups which meet the institutional test query how useful potential for extended definition/ use? Rollover relief

13 Effect: Illustration (1) Investco Parent +25% Investors Investors Investors Sub1 Sub2 Sub3 <10% (x3) Fund/ REIT JPUT SPV ELP Offshore Propco UK Assets TopCo UK PropCo UK Assets Offshore Propco Non-UK and UK Assets Issues Offshore direct charge CGT on disposal of shares Latent gains and pricing Distributions and double tax Acting together Reaggregation Tracing DTTs UK Assets

14 Effect on Regulated Funds: Illustration (3) Type of Fund UK Investor Offshore investor UK Fund No tax on gains in Fund No tax on gains in Fund Tax on investor on disposal No tax on investor on disposal, unless 25% test is met Offshore Fund Tax on gains in Fund Tax on gains in Fund Tax on investor on disposal No tax on investor on disposal, unless 25% test is met

15 Planned enforcement Anti-forestalling rules from 22 November 2017, to prevent treaty shopping Treaty changes in due course For CGT: Like NRCGT reporting within 30 days If not within tax charge, payment of CGT within 30 days For CT: SA If not within the SA regime, treated as an accounting period beginning and ending on the day of disposal Reporting obligations on certain UK advisers within 60 days,if know or believe not reported in time Penalties for late filing Collection mechanisms from UK representatives and group companies

16 What is negotiable? The basic proposal?? Not intended to be! Exemptions: type of investor: UK and overseas pension funds/ certain funds? type of product/ behaviour to be encouraged eg BTR? area? Funds Opaque: equivalence? Transparent? ATED CGT? Impact on free movement of capital?

17 Timing Consultation closes 16 February 2018 Industry reps Entity reps Draft legislation expected this summer (2018)

18 Changes are not in isolation: what next.? Equity Non-UK investor Loans Dividends/ Interest CT changes from 2020 Non-resident landlords to come within the scope of corporation tax Offshore HoldCo Equity Loans Dividends/ Interest Property Management Fees Offshore Propco Loan Interest Bank Rent (NRL) UK Property

19 Leonie Webster Partner Deloitte LLP

20 UK real estate tax CGT update Leonie Webster Monday 22 nd January 2018

21 Real estate funds case study UK fund Overseas pension funds/ sovereign wealth funds Treatment of JPUT Historically company for CGT purposes but non-resident SI 2017/1204 (laid Dec 2017, in force Jan 2018) UK pension funds/charities Fund (JPUT) Other taxable Offshore funds that are transparent funds no longer within s99 TCGA (not companies for CGT) Transparent funds = where individuals resident in the UK would be taxed on income within fund Offshore fund = mutual fund (reporting fund regulations) If JPUT treated as transparent? No occasion of charge where JPUT sells asset? Direct not indirect disposal by unitholder? If JPUT treated as opaque? JPUT LP Double taxation and latent CGT Substantial shareholdings exemption? UK real estate Ability to restructure? Credit for tax in structure for certain investors? UK real estate UK real estate

22 Real estate funds case study UK fund Considerations 1. How do the CGT changes interact with SI 2017/1204? 2. If JPUT treated as transparent how are disposals at the investor level taxed? As direct or indirect? 3. If JPUTs treated as corporates will they benefit from SSE on unit sales. What about asset sales? 4. Ability to restructure out of JPUT into a UK fund without SDLT? 5. Credit for tax suffered in fund for certain investors?

23 Pan-European fund Investor A Investor B (QII) Investor C Investor D (QII) 19% 26% 20% 35% Lux Fund Lux Lux Gross asset values: Real estate funds case study Disposal 2 Disposal 1 Disposal 1 - real estate rich considerations 75% or more of the value of the asset disposed of derives from UK land Based on gross asset value Considered at time of disposal Valuations - just and reasonable attribution (impact of FX?) Base cost? Winding up of funds Double tax treaties and UK choice on MLI (subject to anti-forestalling) Availability of SSE Application to non-uk resident structures Qualifying institutional investors How does fund documentation deal with partial application of SSE? Impact on NAV calculation/redemptions? France 24% 76% UK Disposal 2 - ownership considerations 25% or greater interest Charge applies to 100% of the gain 5 year look-back period French real estate UK real estate Connected parties and acting together

24 Pan-European fund Real estate funds case study Other Rebasing Rollover relief Considerations 1. Valuations and just and reasonable apportionment any practical issues (e.g. FX etc.). Base cost for these purposes if not UK real estate rich at April 2019? 2. SSE for non-residents practical issues (e.g. fund documentation/calculation of tax for NAV etc.) 3. Should charge only be in respect of UK portion of the gain practical issues in respect of this 4. 5 year look back time period?/need for a look back period are existing anti-avoidance provisions enough? 5. Connected party/acting together what is the definition? Prefer this to be closely defined and not include partners/fund arrangements 6. Rebasing any practical issues? 7. Rollover should this be available for all real estate structures?

25 Breakout Session

26 Conclusions and next steps

27 Thank you

HMRC and HMT Consultation Document: Taxing Gains Made by Non-Residents on UK Immovable Properties

James Konya NRCG Consultation HM Revenue & Customs Room 3C/04 100 Parliament Street London SW1A 2BQ 15 February 2018 Dear James HMRC and HMT Consultation Document: Taxing Gains Made by Non-Residents on