Taxing gains made by nonresidents immovable property and other proposals

Transcription

1 22 November 2017 Autumn Budget 2017 Taxing gains made by nonresidents on UK immovable property and other proposals Summary Taxation of gains on UK immovable property Today, as part of the Autumn Budget 2017, the UK Government has announced that, from April 2019, UK tax will be chargeable on gains made by nonresidents upon the direct or indirect disposal of all types of UK immovable property. This will be regardless of the nature of the property or the residence of the disposing entity. The existing non-resident capital gains tax regime will be extended such that widely held companies will also be subject to UK tax upon a sale of UK residential property from April Most property will be rebased from April 2019 so that only gains arising after that date will be in scope to UK tax. Gains will arise in respect of indirect disposals where the entity being disposed of derives 75% or more of its value from UK land (a so-called property rich entity) and also where the non-resident owner of the property rich entity holds or has held at least a 25% interest in the entity at some point within the five years prior to the disposal. The changes should not apply where the UK s treaty with the non-resident s jurisdiction does not afford the UK taxing rights on property gains. Where the treaty does not have a land rich clause, indirect disposals should therefore not be subject to the new rules. However, it is stated that an anti-forestalling rule is being introduced that will be aimed at arrangements that seek to exploit provisions in some treaties. It is also stated that this anti-forestalling rule will remain in place until such time that relevant treaties are amended to prevent any risk of tax abuse.

2 Accordingly we expect that the measure announced today will apply to all overseas property structures in due course. Additionally, any restructuring now is potentially within the scope of the targeted antiavoidance rule within the measure. The announcement results in a fundamental change to the architecture of the UK s capital gains regime which has been in existence for over fifty years. Further, the measure has not been subject to consultation or trial prior to announcement. Whilst the scope, commencement date and key provisions of the new rules are fixed as from 22 November 2017, the UK Government has released a consultation document in order to ensure that the legislation is targeted effectively and does not place unnecessary burdens on affected taxpayers. Other announcements The UK Government has also announced that indexation allowance will be frozen from 1 January 2018 onwards which will need to be taken into account in the computation of gains. Further, it has been announced that non-resident corporates will be subject to UK corporation tax on rental income from April Accordingly from April 2020, in computing taxable profits in respect of rental income, non-uk resident corporates will be subject to the UK s recently enacted regimes in respect of interest restrictions (pursuant to BEPS Action Point 4), anti-hybrid measures and corporation tax loss reform rules, as well as existing corporation tax rules. The fact that this change will not take place until April 2020 is a welcome delay given that the expectation was that it would come into force from as early as April Impact This alert outlines in more detail the scope and potential impact of these changes to UK land transactions. Given gains will be subject to tax from April 2019 but the taxation of rental income will continue to fall within the UK s income tax regime until April 2020, any decisions with respect to potential restructurings or transaction structures (and particularly the timing of any such changes) is likely to require careful consideration. However, given the parity between offshore and onshore structures from April 2020, in the longterm it would appear that REITs, PAIFs and other exempt vehicles will be the only options going forwards for asset level tax exemptions in respect of gains, although even with those there are proposals to revisit their existing capital gains tax exemptions where there is a risk of tax avoidance arising. The UK s recent expansion of the substantial shareholding exemption regime in respect of qualifying institutional investors may continue to be a welcome change for UK holding platforms. Detailed analysis Taxing gains made by non-residents on UK immovable property On 22 November 2017 the UK Government announced that, from April 2019, UK tax will be charged on gains made by non-residents on the disposal of all types of UK immovable property. The intention of the measure is to expand the scope of the UK s tax net such that both direct and indirect disposals of immovable property by non-residents will be subject to UK tax (subject to certain rules in respect of indirect disposals). The changes are to take effect for gains on disposals taking place on or after 1 April 2019 (for companies) or 6 April 2019 (for other persons). An anti-forestalling rule has also been introduced with effect from 22 November 2017 which will apply to certain arrangements entered into on or after 22 November 2017 where the main purpose (or one of the main purposes) is to obtain a UK tax advantage in relation to taxation under these rules. Direct disposals by non-residents From April 2019 the UK Government will tax all gains arising in respect of direct disposals of interests in UK land and buildings, regardless of the nature of the property or the residence of the disposing entity. Accordingly, for the first time, owners will be subject to UK tax on gains arising from the disposal of non-residential property held for long-term investment purposes from April 2019 under the capital gains tax regime. Taxing gains made by non-residents on UK immovable property and other proposals 2

3 Where the disposing entity is a body corporate, from April 2020 it will be subject to corporation tax on this gain (current rate of 19%, falling to 17% from April 2020). All other persons will be subject to the UK capital gains tax regime. The existing Non-Residents Capital Gains Tax charge (NRCGT) which was introduced in April 2015 in respect of residential property will also be extended such that residential property will be subject to a UK tax charge even where the disposal is made by a widely-held company. This will mean that funds and other widely held structures will now be subject to UK tax on gains from Exempt investors (such as overseas pension schemes that qualify for a specific exemption from capital gains tax under UK domestic law) will continue to be exempt or out of scope from this tax in respect of property disposals. Broadly, for direct disposals, the property will be rebased to the value as at April 2019, however see below for certain exceptions to this. Indirect disposals by non-residents The proposals in the Budget will also apply to disposals by non-residents of interests which derive their value from UK property. In particular, an indirect disposal of UK land will be subject to tax where the disposal is of an entity that is considered property rich and where the non-resident owner holds or has held at least a 25% interest in that entity at some point within the five years prior to the sale of the entity. We have considered these tests in more detail below. Meaning of property rich entity For these purposes, an entity will be considered property rich where, at the time of disposal, 75% or more of the value of the asset disposed of is directly or indirectly derived from UK land. The intention is for the 75% to be based on the market value of the underlying assets at the time of the disposal (and will therefore be based on a gross asset value rather than taking into account liabilities of the entity). The rules for determining whether an entity derives its value from UK land will be based on existing UK tax rules but broadly will apply to shareholdings, partnership interests, interests in settled properties or options which derive their value directly or indirectly from land. The rules will also contain tracing rules to allow tracing through different levels of ownership through trusts, partnerships or other arrangements. Where a disposal is to be made of a group of entities, the 75% test would need to be considered in light of the totality of the entities being disposed of in the transaction (so the charge is expected to apply where the underlying entities are property rich even if an intermediate company is not). 25% ownership test The proposals will only bring non-residents into the scope of UK tax on gains on indirect disposals if they hold or have held at some point an interest of 25% or greater in the property rich entity. The intention appears to be to exclude from scope investors with smaller holdings who may not have full visibility in respect of their underlying investments. The holdings of connected parties or parties acting together will need to be considered in determining whether the 25% test is met. Therefore, the expectation is that, for example, it will not be possible to fragment ownership between group companies and partners in a partnership may also have their interests aggregated by virtue of acting together through the partnership. Rebasing rules There are different rebasing rules depending on whether the property is being directly or indirectly disposed of. For all indirect disposals of property rich entities, the property will be rebased to April 2019, meaning that only the change in value from that date onwards will be subject to UK taxation. Non-residents will have the option to use original cost rather than the April 2019 value where a gain would arise under rebasing but the non-resident will in fact make a loss on the disposal. In respect of residential property which does not fall within the existing NRCGT regime (i.e. for residential property that is diversely held, widely marketed or fell within the property specific NRCGT exemptions), the property will be rebased to April Furthermore, in respect of residential property which does not fall within the current Taxing gains made by non-residents on UK immovable property and other proposals 3

4 NRCGT rules, the non-resident will also have an option to calculate the proportionate gain or loss that is attributable to the period postcommencement (which will proportionately reduce the gain). However this option will not be available in respect of direct disposals of commercial property. Where non-residents are already within the NRCGT regime, then April 2015 will continue to be the relevant date for rebasing purposes. Anti-forestalling measures The measures contain an anti-forestalling rule which will seek to counter arrangements entered into on or after 22 November 2017 that are intended to avoid the new charge on non-residents afforded by these measures. The intention of this antiforestalling rule is to prevent treaty shopping and restructuring which is primarily designed to avoid this tax charge. There will also be a targeted antiavoidance rule (TAAR) which will counter arrangements where the main or one of the main purposes of which is to avoid the tax charge under these rules. Other key points Double tax treaties The changes should not apply where the UK s treaty with the non-resident s jurisdiction does not afford the UK taxing rights on property gains. Specifically, where the treaty allocates rights to capital gains on the disposal of shares to the non-resident jurisdiction, and does not have a land rich article, the right to taxation will be allocated to the nonresident jurisdiction. As a result, such indirect disposals should not be subject to the new rules. However, it is stated that the anti-forestalling rule that will be introduced will be aimed at preventing the exploitation of tax treaty provisions to deliberately put profits or gains beyond the taxation rights of the UK (so-called treaty shopping ). It is also stated that the anti-forestalling rule will remain in force as an anti-avoidance rule until such time that the treaties are amended to prevent any risk of abuse. Accordingly, we expect that the change to tax treaties will apply to all overseas property structures in due course. In any case, any restructuring now is potentially within the scope of the targeted anti-avoidance rule within the measure. Substantial shareholding exemption and other reliefs The taxpayer will be entitled to utilise any existing capital losses or reliefs, such as the substantial shareholding exemption if relevant or rollover relief. The prospect of the substantial shareholding exemption in particular will be relevant given that, under the recently enacted Finance (No.2) Act 2017, the UK s existing substantial shareholding exemption will be extended to apply to the sale of property owning companies which are owned by qualifying institutional investors. Accordingly the UK can still prove to be an attractive jurisdiction for holding companies. Real Estate Investment Trusts (REITs) Gains arising to a REIT s property rental business will continue to be exempt within the REIT itself. However if the REIT itself satisfies the property rich test then a disposal of shares in a REIT by a non-resident entity will be subject to UK tax where that person has held at least a 25% interest in the UK REIT within the 5 years prior to the disposal (unless that shareholder otherwise qualifies for an exemption from UK tax). Where a non-resident member of a UK REIT disposes of a UK property, then that disposal will fall within the scope of UK tax with the effect that the gain will be treated as an exempt gain under the REIT rules (as opposed to being outside the scope of UK tax by reason of residence as is the current position). Although REITs are not required to distribute exempt gains, if the REIT member does distribute the profit arising from the exempt disposal this would be treated as a property income distribution (and would therefore be subject to 20% withholding tax). Under current law, any such disposal would fall outside the scope of UK tax (rather than being exempt under the REIT regime) and therefore a distribution from such a gain would be treated as an ordinary dividend (with no withholding tax) rather than a property income distribution (with 20% withholding tax). Taxing gains made by non-residents on UK immovable property and other proposals 4

5 Tax-Exempt investors and UK Collective Investment Vehicles (CIVs) Where investors are tax-exempt by virtue of a specific provision in the tax legislation (such as registered pension schemes or overseas pension schemes) the intention is for those investors to continue to be exempt from tax under these measures. Any collective investment scheme (CIV) (where defined as such from a regulatory perspective) that is currently exempt on direct property disposals will continue to be exempt. However, importantly, the indirect disposal rules set out above are expected to apply where a non-resident disposes of an interest in the CIV. Accordingly, where a CIV itself is property rich then a non-resident company which holds or has held at least a 25% interest in the CIV at any point within the five years prior to the disposal will be subject to tax on the gain arising from a sale of shares in the CIV. Compliance Broadly, for all direct and indirect disposals, a seller will need to report the transaction to HMRC within 30 days of the disposal. This is the same as for the existing NRCGT regime. The measure will also impose a reporting requirement on certain advisors who are aware of a transaction that has taken place where these measures could apply. Subject to certain conditions being met, that third party advisor will be required to report the transaction to HMRC within 60 days (to allow sufficient time for the non-resident to report the transaction to HMRC within its 30 day limit). Other proposals Non-resident companies to be taxed under UK corporation tax regime from April 2020 The UK Government also announced in the Autumn Budget 2017 that, commencing from April 2020, non-resident landlords (NRLs) will be subject to UK corporation tax on their rental income (rather than income tax as at present). Furthermore, gains arising from the new measures outlined above will fall within the UK corporation tax regime from April 2020 (rather than capital gains tax). While the aforementioned change should result in NRLs now being able to benefit from both a lower tax rate as well as the ability to now group relieve losses, they will also result in NRLs being subject to significant additional complexities driven by having to now consider rules such as interest restrictions, loan relationships, distributions and loss reliefs (including the UK s recent changes limiting the amount of carried forward losses that can be utilised against profits in excess of 5m to 50%). Abolition of indexation allowance on gains Traditionally, companies have been entitled to claim an indexation allowance when calculating corporate chargeable gains. This indexation allowance was calculated broadly based on movements to inflation between the date of acquisition of an asset and the date of sale. The Government has announced that this indexation allowance will be frozen from 1 January 2018 onwards, meaning that no relief will be available for any inflation accruing after this date in calculating chargeable gains made by companies. Accordingly, companies will have to factor in a resultant increase in tax exposure on gains in the future. Impact of these changes Together these changes mark a significant change to the way that UK property will be taxed going forwards. Given gains will be subject to tax from April 2019 but the taxation of rental income will continue to fall within the UK s income tax regime until April 2020, any decisions with respect to potential restructurings or transaction structures is likely to require careful consideration. However, given the parity between offshore and onshore structures from April 2020, in the longterm it would appear that REITs, PAIFs and other exempt vehicles will be the only options going forwards for asset level tax exemptions in respect of gains, although even with those there are proposals to revisit their existing capital gains tax exemptions where there is a risk of tax avoidance arising. Taxing gains made by non-residents on UK immovable property and other proposals 5

6 The UK s recent expansion to the substantial shareholding exemption regime in respect of qualifying institutional investors may continue to be a welcome change for UK holding platforms. Though REITs will continue to be exempt on property gains arising to its property rental business, as a REIT could itself be treated as a property rich entity if 75% or more of its value derives from UK land, it may be that UK REITs may change their investment strategy to invest more in overseas investments in order to mitigate the capital gains tax exposure for non-residents who invest in REITs. This is especially the case for REITs which do not benefit from the extended substantial shareholding exemption applicable for qualifying institutional investors. Taxing gains made by non-residents on UK immovable property and other proposals 6

7 EY Assurance Tax Transactions Advisory How we can help EY s real estate tax team can advise you on: How these rules impact your past, current and future UK land dealing and development activities/transactions. The steps you need to take if activities or transactions are within the scope of the rules to manage your UK tax compliance. Further information For further information, please contact one of the following or your usual EY contact: Russell Gardner rgardner1@uk.ey.com Marion Cane MCane@uk.ey.com Nicola Westbrooke nwestbrooke@uk.ey.com Matt Maltz mmaltz@uk.ey.com Richard Ross RRoss1@uk.ey.com Richard White RWhite@uk.ey.com Maheshi Ratnasekera MRatnasekera@uk.ey.com About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization and may refer to one or more of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com. Ernst & Young LLP The UK firm Ernst & Young LLP is a limited liability partnership registered in England and Wales with registered number OC and is a member firm of Ernst & Young Global Limited. Ernst & Young LLP, 1 More London Place, London, SE1 2AF Ernst & Young LLP. Published in the UK. All Rights Reserved. ED None In line with EY s commitment to minimise its impact on the environment, this document has been printed on paper with a high recycled content. Information in this publication is intended to provide only a general outline of the subjects covered. It should neither be regarded as comprehensive nor sufficient for making decisions, nor should it be used in place of professional advice. Ernst & Young LLP accepts no responsibility for any loss arising from any action taken or not taken by anyone using this material. ey.com/uk Taxing gains made by non-residents on UK immovable property and other proposals 7