UK tax will apply to the disposal by non-UK residents of all UK property (commercial and residential) from April 2019.
There will also be a UK tax charge where a non-UK resident realises a gain on disposal of a 25% interest in an entity which derives directly or indirectly 75% or more of its gross asset value from UK property.
Generally only gains accruing from April 2019 will be within the charge to tax and historic gains will be excluded. For residential property already within the scope of the Non-Resident CGT regime, gains from April 2015 will continue to be within the charge to tax.
Overseas pension funds registered in the UK will be exempt from capital gains tax on disposal of UK property investments or interests in UK property rich entities. Also companies owned as to at least 80% by qualifying institutional investors such as pension funds, life assurance companies and investment trusts will be able to benefit from the substantial shareholdings exemption when disposing of 25% shareholdings in property rich companies.
Despite the historic nature of this change in UK tax policy, the writing has been on the wall for some time. It follows the pattern of a gradual widening of the UK tax net for overseas investors in UK property over the last few years.
The UK is practically the only developed country in the world not to charge tax to non-residents on the disposal of commercial property located in its jurisdiction. Most double tax treaties allocate taxing rights on immoveable property to the State in which the property is located. You could characterise this Budget announcement as bringing UK tax policy on commercial property gains into line with that in other countries.
It has been a feature of the UK property market for several years that overseas investors, particularly from China and the Middle East, have dominated the acquisition of high value commercial UK property. Much of this investment is held through offshore structures, such as non-UK resident companies and unit trusts.
Elliot Weston, partner tax practice, at Hogan Lovells London, says we may see a flurry of sales and restructurings in 2018, but many investors are long term holders of UK property.
In the future, investors will look at onshore structures for holding UK property. The proposed reduction in UK corporation tax to 17% from April 2020 will mean that a UK holding company may be a simple and relatively attractive option.
Alternatively there are tax exempt vehicles like open-ended property funds (PAIFs) or listed property companies (REITs). One likely impact of the change is that investors will look closely at converting existing joint venture vehicles and funds into UK REITs.
The government has made its policy intentions clear, but there is a consultation on the shape of the legislation which is open for comment until 16 February 2018.