What you need to know to prepare for the new capital gains tax for overseas investors
Andrew Hoban Commercial Valuations
Jonathan Ruback City Investment
Capital gains tax was introduced in the UK in 1965. But, for 50 years, non-residents were exempt from having to pay a levy on any gains made as a result of upward movements in property prices, which made the UK a particularly attractive destination for property investors from all over the world. The UK has been a magnet for property investors due to the size and transparency of its real estate sector, and its ability to offer investors favourable tax treatment further added to its appeal.
All this changed in 2015, with the introduction of a capital gains tax on residential property. Nevertheless, these new rules meant that a large proportion of real estate, notably commercial property, remained unaffected. This loophole is now closed.
What has changed and why should I be concerned?
A new rule will come into force: from 1 April 2019, non-UK companies disposing of a UK-based real estate asset will be taxed on the profit they make from the transaction. The same rule will be applied to individuals from 6 April 2019. It is important to note, however, that the tax will only be applied on the gain, not the total amount received when an asset is sold.
This change in legislation has important implications for overseas investors in both real estate and investment vehicles, whose portfolio is predominantly (75% and above) comprised of bricks and mortar assets.
What tax rates will be applied to the profit made from the sale of my property?
Tax rates will vary. Foreign companies will be charged at the corporation tax rate of 19%, which will be reduced to 15% by April 2020. It is worth noting, however, that the UK will continue to compare favourably to other countries, where the rates are much higher, with the US imposing a 38.9% tax on foreign corporations, France 34.4% and Germany 30.2%. Individuals will be taxed at the rate of 20% for commercial property and 28% for residential property.
Are there any exemptions?
Yes. Investment vehicles, including sovereign wealth funds, REITs and pension funds will be exempt from the tax on their disposals. However, if an oversees company disposes of shares held in a property-rich vehicle, which derives 75% or more of its value from real estate, any gains made will be subject to tax.
These new arrangements are accompanied by new anti-avoidance rules, introduced in 2017, which seek to prevent those who fall within the scope of the new regulation from restructuring their portfolios.
Is there anything I can do to prepare?
There is. Overseas investors in UK commercial property will need to value their assets as of 1 April or 6 April (depending on whether the investor is a company or an individual) as any increase in value before that date will not be subject to tax under the new rules. The Allsop valuation team can help with undertaking a ‘Red Book’ compliant valuation, issuing a formal valuation document and assist with future negotiations with HMRC.
Property owners may have implemented asset management initiatives prior to April 2019. This may have included agreeing pre-lease agreements, settling rent reviews or lease renewals and undertaking capital expenditure. This would have minimised the amount of capital gains tax paid post-April 2019.
The Allsop valuation team is well placed to assist investors and provide expert advice on valuations for tax and accounting, helping clients successfully navigate new regimes regardless of complexity.