Non-residents’ tax on capital gains on UK land
Capital Gains Tax (CGT) applies to non-residents disposing of UK land and certain interests in assets that are ‘property-rich’, unless the disposal is already caught by legislation that applied from 5 July 2016. This article explains in detail.
Updated 26 March 2021
Since 6 April 2019, unless an asset has a relevant connection to the person’s UK branch or agency (gains on which are already chargeable), non-UK residents are subject to tax on capital gains from disposals of UK land and of interests in assets that are ‘property-rich’.
An entity is ‘UK property-rich’ if at least 75% of the value of its assets is represented by interests in UK land (disregarding land that is used in the entity’s trade) after deducting liabilities relating to assets other than UK land.
The disregard of land used in the entity’s trade has been much discussed. The conclusion is that land held as trading stock by a property dealer is not used in a company’s trade in the way that a factory or offices might be. But land held for development, perhaps by a housebuilder, is used in a qualifying trade of property development. In some cases, however, a gain on the disposal of an interest in a company that is UK property-rich might be taxed as income under the post 5 July 2016 legislation mentioned below rather than as a capital gain.
Except in the case of interests in UK property rich collective investment vehicles (CIVs), a gain on an interest is only chargeable if the person making the disposal (together with those ‘connected’ with that person) owns at least a 25% interest, or held such an interest within the preceding two years. There is no de minimis in the case of interests in UK property-rich CIVs.
Widely-held CIVs may elect to be treated as transparent, so as to move the incidence of tax on relevant gains to its investors. They are then chargeable on their shares of the gains, unless they are exempt such as pension funds.
Individuals and trustees are subject to capital gains tax, companies to corporation tax.
Disposals by non-resident individuals and trustees have to be reported to HMRC within 30 days of completion (even if there is no tax liability). They have to pay any capital gains tax within 30 days of completion, unless - but only for disposals in 2019/20 - they had already filed a self-assessment return, in which case the tax was payable by 31 January 2021.
Disposals by companies only have to be reported to HMRC if there is a liability. In 2019/20, and in subsequent years if not then otherwise subject to corporation tax, a non-resident company having a disposal within the new regime on which tax is payable should advise HMRC within three months of exchange.
For many companies, their corporation tax on gains on such disposals would be due almost immediately. This is because a disposal would result in the company having a one-day accounting period and qualifying as a ‘large' or 'very large company'. However, in such circumstances, HMRC proposed by concession that tax should be paid within 3 months and 14 days after the disposal. That is, when contracts are exchanged unconditionally, not the time of completion.
This situation changed from 6 April 2020 for a company with taxable income, when non-resident companies’ rental income became subject to corporation tax instead of income tax. Disposals are to be reported as part of the corporation tax return. The tax is payable 9 months and a day after the accounting period (again unless it is sufficient to require earlier payment in instalments because the company is 'large' or 'very large'.).
Years preceding 6 April 2019
For years preceding 6 April 2019, capital gains tax applied to non-resident individuals, trusts and close companies disposing of UK residential property, with some exceptions, on gains arising on disposals in the period from 6 April 2015 to 5 April 2019.
Before 6 April 2015, tax did not apply to non-residents’ capital gains, other than those carrying on a trade in the UK and, from 6 April 2013 to 5 April 2019, to companies subject to the 'annual tax on enveloped dwellings' (ATED) charge.
For residential property held on 6 April 2015 by individuals, trustees and close companies, and disposed of on or after that date, the 'default' position is for the gain on disposal to be the excess over the market value at 5 April 2015. Alternatively, an election may be made to apportion the gain over original cost (or the market value at 31 March 1982 if acquisition was earlier) by reference to the proportion of ownership after 5 April 2015 compared with the total period of ownership, or adopt the overall gain or loss as chargeable/allowable.
Otherwise, the chargeable gain is limited to the excess over market value at 5 April 2019 if held at that time, or the excess over subsequent cost, save that an election may be made to adopt the original cost if that was before 6 April 2019.
A replacement for the 5 July 2016 arrangements?
It is important to note that these provisions do not replace those applicable from 5 July 2016, which treat profits or gains realised from a disposal of any UK land by both residents and non-residents as a trading profit, and therefore as income, if any of four conditions is met.
The four conditions are:
- The main purpose, or one of the main purposes, of acquiring the land was to realise a profit or gain from disposing of it.
- The main purpose, or one of the main purposes, of acquiring any property deriving its value from the land was to realise a profit or gain from disposing of the land.
- The land is held as trading stock.
- In a case where the land has been developed, the main purpose, or one of the main purposes, of developing the land was to realise a profit or gain from disposing of the land when developed.
...unless any gain would be eligible for the main residence capital gains tax exemption.
- a person realises a profit or gain from a disposal of any property which (at the time of the disposal) derives at least 50% of its value from land in the UK;
- the person concerned is a party to, or concerned in, an arrangement concerning some or all of the land mentioned; and
- the main purpose, or one of the main purposes, of the arrangement is to deal in or develop the land and realise a profit or gain from its disposal or of property deriving its value from that land
...the profit or gain realised is treated as profits of a trade.
In practice this will not apply where the entity concerned, perhaps a company whose shares are sold, holds the UK land as trading stock.
Double tax agreements
The OECD model convention says -
Gains derived by a resident of a Contracting State from the alienation of shares or comparable interests, such as interests in a partnership or trust, may be taxed in the other Contracting State if, at any time during the 365 days preceding the alienation, these shares or comparable interests derived more than 50 per cent of their value directly or indirectly from immovable property, as defined in Article 6, situated in that other State.
Some agreements exclude shares regularly traded as an approved Stock Exchange. Many refer only to the underlying assets at the time of disposal.
Specific advice should be obtained before taking action, or refraining from taking action, on the basis of this information.
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