06 Dec 2017

CAPITAL letters - Issue 25


Layer cake - the taxation of UK real estate

I have complained before about the increased complexity of property taxes in the UK - with the unholy trinity of CGT, non-resident CGT (NRCGT) and ATED related gains to grapple with. Our Chancellor recently made the situation even worse (thanks Phil) with the announcement in the Budget of an imminent introduction of CGT to non-residents who own commercial property, an extension in scope of NRCGT for residential property and the introduction of a new species of CGT, relating to indirect disposals of UK property, both commercial and residential. The Treasury has issued a consultation document, which is an immensely satisfying read, should you have trouble sleeping.

Add to this the changes last year to the income and corporation tax rules on development property profits, realised directly or indirectly, and you have a grotesque layer cake of taxes. If this doesn’t give you indigestion, nothing will.

Direct disposals of commercial property

There will be an extension of NRCGT to non-resident owners of commercial property in the UK. Corporate owners will be charged to corporation tax (at the rate of 19%) and individuals/trustees at the personal rate of, we assume, 18/28% so that it is in line with the rest of NRCGT. These changes mean that from April 2019 all non-resident owners of any kind of UK real estate will be liable to CGT on gains and the rules will therefore be ‘harmonised’, which is the expressed intention of this change. The fact that it will also raise more tax revenue is entirely coincidental.

Non-resident owners will be able to re-base the value of their property to April 2019, meaning that only gains after that date will be chargeable. So far, so simple.

Indirect disposals of UK property

This is where it starts to get difficult - the plan is to charge non-residents to CGT on the disposal of shares in companies that are ‘property rich’.

A property rich company is one that derives 75% or more of its value (directly or indirectly through any layer of subsidiaries) at the time of disposal from UK property of any description – commercial, residential or mixed. There will be a charge to CGT on the sale of shares in property rich companies, but only for people who hold 25% or more of the shares. In calculating the 25%, account is to be taken of shares held by connected persons. The definition of connected persons has been extended to shareholders who are ‘acting together’ but who are not otherwise related. There is a 5 year 'look back', meaning that if you satisfied the 25% threshold at any point in the 5 years prior to the share sale then you are still caught. This is to stop people from engineering programmed disposals in order to stay under the threshold.

The charge to CGT will be on the profit on the shares, not the underlying UK real estate, subject to a re-base to April 2019 for the non-resident shareholders concerned. This means that your CGT liability will not be directly related to any identifiable gain on the underlying properties – for instance, the values of your UK properties could be static and any appreciation of value in your shares generated by the other 25% of the company assets and, yet, you will still be liable to CGT.

This is one of the many issues that arise when you try and tax shareholders by reference to property held by a company, rather than by reference to the shares themselves. HMRC justifies this by saying that non-resident shareholders should not be able to profit from UK land without paying UK tax – which would be fair enough if HMRC hadn’t also extended NRCGT to companies, meaning that CGT will be payable anyway. In effect, HMRC will get its tax twice on the same capital gain – once when the shareholder sells his or her shares and again when the company sells the land. This feels a bit desperate and it is likely to act as a serious disincentive to foreign investors, just when we should be encouraging investment into a post-Brexit UK.

The measure is to be introduced in the name of ‘harmonisation’ – a nomenclature often used to disguise a Revenue raid – yet it is anything but harmonious with the companion measures in our income and corporation tax code, called the ‘transaction in land’ (TIL) rule. Under that TIL rule, which is another indirect property tax, there is only a tax charge on the shareholder if the land would not be taxable to income/corporation tax at company level on an ultimate sale of the land by the company. In this respect the existing TIL rule makes sense and could even be said to be ‘fair’. However, even if I was feeling generous (which is rare) the same cannot be said for the proposed CGT rules.

Extension of NRCGT for residential property

The plan is to extend the scope of NRCGT for residential property by removing certain exemptions - those for widely held companies, collective investment schemes and life assurance companies.

Where the property is held by a collective investment scheme which is otherwise exempt from CGT, such as a REITs, PAIF or an Exempt Unauthorised Unit Trust, then the idea is that non-resident investors will be taxed on the gain when received.

Reporting and compliance

HMRC recognises that indirect taxes such as those proposed will be difficult to track where both the investor and the vehicle are non-UK resident. Let’s say a Cayman trust disposes of its interest in a BVI company that holds, through a subsidiary in Jersey, an office building in the UK. Since there has been no Land Registry transfer, only a BVI share transfer, HMRC couldn’t possibly know about the transaction.

In an attempt to deal with this problem there will be an obligation upon UK based advisors who have ‘reason to believe’ that there has been an indirect disposal of UK property and that they have 'reason to suspect' that tax is not being paid. In these circumstances there is a duty to report the same to HMRC within 60 days of the transaction. There will, of course, be penalties for those advisors who do not comply.


By extending NRCGT to commercial property then HMRC will have achieved its stated aim of harmonising the rules for commercial and residential property, but only for direct disposals. For indirect disposals of land (via ‘property rich companies’) we are promised a new species of the TIL rules, but these are not in 'harmony' with the existing TIL rules, nor are they fair. It is therefore difficult to see how the proposed measure satisfies the stated policy objectives.

With regard to the reporting requirements, this is a worrying proposal as it asks advisors (who will mostly not be tax qualified) to both understand and police the tax affairs of non-resident persons. It also presupposes that the advisors in question will even be aware of the obscure new TIL rule. What could possibly go wrong…?


Tree tips

It has probably not escaped your notice that we are embarking on that long, slow road to Christmas and I feel duty bound to provide you with a festive offering. I have consulted with some of the world's leading designers (I didn’t just Google it) to come up with some top tree decorating tips.

  1. Cluster your baubles. Yes, you heard me. Don’t spread them around evenly, that's so old hat, instead use clusters of three, each one a different size. Using clusters of three is an old gardening trick to give maximum impact in planting schemes and it translates well on the tree.
  2. I'm going crackers! The temptation is to leave those premium Waitrose crackers in a box until the Christmas lunch, but that's a waste. What you do is lay them across the branches of the tree in a beguiling but decorative fashion. You then invite your inebriated guests to choose a cracker from the tree on Christmas day. It won't end in disaster. Or maybe it will.
  3. Bring the garden inside. Try using dry twigs and cut ivy as tree decorations, it will make your tree look more authentic and potentially a little strange, but then cutting down a perfectly good tree and dragging it indoors is strange behaviour anyway.
  4. Forget all the above and have a drink. Happy Christmas!


Emily Osborne

Emily Osborne

T:  +44 20 7809 2433 M:  +44 7525 896 899 Email Emily | Vcard Office:  London

James Quarmby

James Quarmby

T:  +44 20 7809 2364 M:  +44 7958 776 759 Email James | Vcard Office:  London

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