Made a gain? Now the pain!

If you are an offshore investor in the commercial property sector in the UK, then to date, you have not been taxed on any gain that you make when you come to sell.

Following the various imposition of increased taxes on the residential property sector, we have seen many of our offshore clients switch their investment strategy to commercial property. Not only does the sector remain relatively buoyant, the costs of entry are now significantly lower than high end residential property.

However, from April 2019, that tax free regime on any gain made will change.

The key changes proposed are as follows:

  • Most non-UK residents will be chargeable on gains accruing on the direct and indirect disposal of non-residential (commercial) property.
  • The existing capital gains tax charge for non-UK residents disposing of UK residential property will be extended to indirect disposals and disposals made by widely-held companies.

The rules will come into force on 1 April 2019 (6 April 2019 for individuals) and, for the first time, the charge to UK capital gains tax will be extended to include gains made by non-UK investors in UK commercial property and in certain “property-rich” vehicles.

In addition to taxing direct disposals of UK commercial property, disposals of “property-rich” assets will also be caught by the new legislation (such as shares in a company) that derive at least 75% of their value from UK commercial property.

Under the revised proposals in the Finance Bill, an offshore investor will be exempt from UK tax on any gain on disposal of a property-rich company if the investor can reasonably show that the underlying property is, to all but an insignificant extent, used in the course of a trade carried on by the company or a person connected to the company. The trade must have been ongoing for at least a year prior to the sale and must be expected to continue. How this exemption will be applied in practice remains to be seen, but this could be an important development for investors in companies carrying on UK businesses such as hotels and some retail businesses.

Crucially however, and unless the investor elects otherwise, any gain will only be taxed to the extent that it increases above its value as at April 2019. This “rebasing” of assets means that even if an investor is sitting on a huge gain on March 31st 2019, none of that gain will be taxed. If it then increases in value further, that increase will, however, be taxed. The rules will also now allow for rebasing of a holding in indirect assets to the April 2019 market value. Before the consultation process, rebasing was only going to be possible for direct disposals of UK property.

Having hit the residential property sector, it was surely only a matter of time before the Government looked to raise revenue from commercial property. The rebasing will be a relief to a number of our offshore clients who have invested in commercial property in the UK for a number of years but more careful planning of holding vehicles and structuring will now be required in the future.

If you are an offshore investor in the commercial property sector in the UK, then to date, you have not been taxed on any gain that you make when you come to sell.