On the 22 November 2017 HMRC issued a consultation on: Taxing gains by non - residents on UK Commercial Property This post:
- Summarises the contents of the HMRC consultation document.
- Identifies some possible consequences for life company investors.
- Looks at next steps.
The Consultation
Comes after a budget day 2017 announcement that tax will be charged on gains made by non - residents on all types of UK immovable property. There seems little prospect that this basic intention will be relaxed.
The measure will expand the tax base both for capital gains tax and corporation tax. Corporation tax will apply to entities that would be within the charge to corporation tax were they UK resident.
In addition to applying capital gains tax to direct disposals by non - residents the rules will catch certain indirect disposals where a non - resident has a holding in a "property rich entity". But those rules will only apply where the non resident had a holding of 25% or more in the property rich entity at the time of sale or in the 5 years prior to disposal. There will be certain disclosure rules for advisers involved in a transaction to which the indirect disposal rules apply.
The new rules will extend to non - resident holdings in residential property. Such holdings are already subject to UK tax but using a confusing, piecemeal system.
There will be a rebasing of property values to April 2019 so that only gains on UK commercial property accruing after that date are taxable.
At present some offshore collective funds are exempt from UK tax on UK property holdings by virtue of their non - resident status. It is proposed that such collectives will be liable to corporation tax / capital gains after the introduction of the new rules.
Consequences For Life Companies
The area that is most important for life companies is the treatment of offshore collectives, currently not subject to capital gains tax. Imposing a UK tax charge at the level of the offshore investment vehicle potentially makes such investments unattractive. That is exempt pension policyholders will, indirectly, suffer the UK tax in the offshore fund which they should not be exposed to. [There is a similar issue for investors via SIPPs and ISAs]. Taxable policyholders are potentially exposed to double taxation of gains, once in the foreign collective and again in the UK life assurance company.
Next Steps
The consultation closed in February 2018 and HMRC are currently analysing feedback. There is a proposal to publish draft legislation in the late summer of 2018. Not surprisingly the proposals concerning offshore collective investment vehicles have been a cause of concern. The response to the consultation by the Association of Real Estate Funds outlines some the difficulties and proposes certain solutions. But until HMRC responds there is considerable uncertainty. In the meantime it would seem unwise for a UK life insurance company to invest in or top up existing holdings in non - UK resident property funds investing in UK aasets unless this is unavoidable. For existing holdings it is probably necessary to wait and see what the draft legislation looks like before making decisions.
Please see update for final rules.
(RB 8th April 2019)
Please see update for final rules.
(RB 8th April 2019)
