Recent changes to property tax
11 June 2019
The taxation of UK property has changed significantly over the last few years. The government's objective has been to achieve parity in the tax treatment of UK and non-UK resident property owners, as well as to reduce the tax reliefs available to landlords and increase taxes payable by owners of multiple residential properties. However, if proposals under current consultations are enacted, the tax regime applicable to non-residents will be punitive.
Here is a summary of the most recent changes, as well as those on which the government is currently consulting.
As has been the case over the last few years, property owners should continue to take advice to ensure that the way in which they hold property remains fit for purpose, as well as compliance with the UK tax regime.
Capital gains tax
All UK property (both residential and non-residential) now falls within the scope of CGT.
However, non-resident commercial property owners do benefit from a rebasing of the value of their property to its April 2019 value for CGT purposes (ie CGT will only arise on the disposal of commercial property to the extent that the value of the property has increased since April 2019).
Both direct and indirect sales of property now fall within the CGT regime as disposals of 'property-rich' entities (entities deriving 75% or more of their value from property) are caught within this new regime.
On a separate note, the Government is consulting on the proposal to reduce the final period exemption for principal private residence relief from 18 months to 9 months. This was previously reduced from 36 months to 18 months. This consultation also includes the proposal that lettings relief will be removed and will only apply where an owner is in shared occupancy with a tenant. It is proposed that these changes, if implemented, will be effective from April 2020.
Property owning companies will now be subject to corporation tax in relation to any gains triggered on a disposal of property during the current year. This will require affected entities to register for corporation tax. However, it is worth noting that, even if a disposal does not realise a gain, the selling entity will still be required to register for corporation tax to report the disposal.
However, during the current tax year those companies will still fall within the income tax regime in relation to rental income. This will change in the next tax year (2020/21), so that all profits (of both a gains and income nature) will be subject to corporation tax.
This tax has been abolished (although ATED charges will continue). Instead, any disposals of residential property owned by non-residents will trigger a CGT/ corporation tax charge, to the extent that the property has increased in value since April 2015 (the date on which non-resident residential property owners first fell within the scope of CGT).
This may be favourable for property owners which previously fell within the ATED regime from April 2013 (where CGT would be charged on the disposal of the property by reference to its April 2013 value).
Stamp duty land tax
Earlier in the year, the Government published a consultation on a proposed SDLT surcharge for non-residents acquiring residential property. This consultation has now closed.
No date has been given for the introduction of the surcharge.
The principal proposal is for a 1% surcharge to apply to non-resident individuals, companies, partnerships and trusts (including unit trusts). Trusts will be caught if any individual beneficiary with a life interest is non-UK resident or, in the case of discretionary trusts, if the trust is non-UK resident for UK tax purposes. UK resident close companies will also be within the scope of the surcharge if they are under the direct or indirect control of one or more non-UK resident persons.
Following the Government's announcement in 2016 to introduce a beneficial ownership register of the foreign entities that own UK property and the publication of the Draft Registration of Overseas Entities Bill last summer, the Committee appointed to consider the draft Bill has now published its recommendations. The rationale behind the register is to increase transparency in the UK property market in order to address the perceived risk that UK property might present an opportunity for criminals to launder money. The regime will require overseas entities to provide information on their beneficial ownership before they are able to purchase real estate in the UK. This information will be stored in a publicly available register (similar to the UK's existing PSC regime in relation to UK entities).
The Committee has expressed concern that the regime will not capture trusts, albeit that the definition of 'overseas entity' in the draft Bill includes corporates, partnerships or 'other entit(ies) that…(are) a legal person under the law by which (they are) governed.' Clarification as to which entities will be required to register will be needed. In addition, the Committee has recommended that property vendors update their ownership information on an annual basis, and update information about proposed transactions before they take place, as well as the replacement of the draft Bill's criminal sanctions with civil penalties that will be easier to enforce abroad, and that can be applied against land or other assets in the UK.
The new register is due to go live in 2021.