Capital gains tax rules for non-UK resident investors are in force. Who and what is impacted by these? Simon Hart, director, asset management tax at KPMG, answers questions
Since 6 April 2019, a new legislation by HMRC subjects non-UK resident investors to capital gains tax (CGT) on disposals of UK property. As well as sales of physical UK property, this legislation extends to disposals of shares in companies and interests in collective investment vehicles (CIVs) and real estate investment trusts (REITs) that are rich in UK property.
This legislation will impact non-resident investors in UK property, including real estate funds. Simon Hart, director, asset management tax at KPMG, explains how the law operates and highlights intricacies and complexities in the legislation that need to be considered on a case-by-case basis.
Disposals of UK property – the rules apply to direct disposals of UK property and disposals of shares of companies or collective investment vehicles which are rich in UK property.
UK property rich shares/CIVs – these are shares or units in companies or collective investment vehicles, including REITs, where broadly the gross asset value of the balance sheet of the company is 75% or more made up of UK land and property.
Re-basing – the tax base of an asset in this context is the amount deductible against consideration when calculating the gain from disposal. Re-basing means that only gains from 6 April 2019 onwards should be subject to non-UK resident CGT.
Tax leakage at fund level – this refers to a tax liability of a collective investment vehicle, which indirectly reduces an investor’s return and is not creditable or otherwise reclaimable.
How are investors impacted by this legislation?
This legislation applies to certain disposals of UK property and UK property rich shares/CIVs made by non-UK residents since 6 April 2019. The type of CIVs that are potentially in scope is explained below. An individual must report to HMRC within 30 days of the disposal. The short turnaround for reporting may present difficulties for wealth managers and intermediaries to report and notify the client in enough time to meet this deadline.
The rules are complicated. Certain investors may be able to rely on provisions in double taxation treaties that could take them outside the charge, but there are relatively few other exemptions. For example, the UK double taxation treaty with Ireland includes a provision that excludes property rich shares that are regularly traded on a stock exchange. However, overseas pensions schemes are exempt. The rules include ‘re-basing’, meaning it is broadly only gains relating to after 6 April 2019 that are in scope.
What assets are within scope of the new rules?
The significant point for investors is that the new rules potentially bring non-residents into the charge for the first time in respect of the disposal of shares in UK property-rich companies and holdings in CIVs/REITs. A company is broadly considered UK property-rich and within the scope of the rules where the balance sheet of the company is 75% or more made up of value of UK land or property. CIVs may fall in and out of scope of the rules as a consequence of changes in valuations or holdings impacting whether the 75% threshold is met. This could particularly be the case for open ended property funds.
Why is this a particular issue for funds?
There is a 25% de minimis holding requirement of shares in companies to come within scope of the rules. For CIVs and REITs there is no de minimis so any disposal by non-residents of a UK property-rich REIT or UK property-rich CIV comes within scope of the charge. There is also a complex sub-set of rules in relation to funds. UK property-rich funds may make certain elections that can impact the tax treatment. The elections available are the transparency election and the exemption election. The transparency election is available to certain contractual and trust CIVs and broadly means that the CIV is treated as fiscally transparent. The investors may then be allocated amounts and subject to UK tax based on their own tax profile. This could result in ‘dry’ tax charges, because gains could be allocated without cash distributions. The exemption election is generally available to widely held funds and should remove UK tax from within the structure. Investors remain potentially subject to non-resident CGT in relation to certain distributions and redemptions. Investors in these funds should review the tax profile of their holdings.
Funds holding UK property-rich shares as part of a broader portfolio cannot make these elections. These funds where they realise gains from UK property funds will have tax leakage at fund level (see boxout for definition) and a requirement to submit tax returns to HMRC. This is likely to be relevant to many funds, given that many have UK REITs in their portfolios. Funds resident in certain jurisdictions may be able to claim an exemption under a double taxation treaty. Certain treaties exclude shares from the UK charge where they are substantially and regularly traded on a stock exchange. For example, the US and Irish treaties contain these provisions.
About the expert
Simon Hart is a director within the asset management tax group at KPMG LLP and has over ten years’ experience working with asset managers, investment funds, institutional investors, wealth managers, and family offices.
Simon is the tax lead for wealth management, and has a focus on alternative assets. Simon is on the Investment Association Working Group for non-residents capital gains tax. Before joining KPMG he read Government and Economics at the London School of Economics. He is member of the ICAEW.
What are the relevant tax rates that now apply?
Gains made by non-resident individuals from the disposal of UK property funds and REITs are subject to CGT which, depending on whether they are a basic rate or high rate payer, will be either at 10% or 20%. Individual investors should be entitled to the capital gains annual allowance, which is currently £12,000. Corporate investors and funds will be subject to tax at the corporation tax rate, which is currently 19%.
What is the impact on offshore bond providers and the bond holders?
There could be irrecoverable tax suffered within an offshore bond wrapper that realises gains on investments that are within scope of the rules. This is because the assets are typically held by a non-resident life insurance company, which would be within the charge to the new tax provisions relating to non-residents. This cost would likely be passed to bondholders, including UK tax resident participants. There is no mechanism for that tax to be refunded or credited to UK resident investors in offshore bond wrappers. The introduction of the tax could also cause administrative and compliance issues.
What can funds and investors do to manage this?
Investors should review their portfolios for assets that may be in scope and consider whether it is necessary to register with HMRC. Wealth managers may need to put in place mechanisms to assist non-resident clients with identifying relevant disposals. Many investors may be invested in UK property rich REITs as part of a diversified investment portfolio. There are three REITs within the FTSE 100: British Land Company; Land Securities Group; and Segro.
Exempt investors, such as overseas pension schemes, should review their holdings and consider whether there is indirect exposure to the new rules, for example because of products invested in. It may be relevant to understand whether UK property-rich funds have made either of the elections described in the following paragraph.
Funds should consider whether they are UK property-rich funds and assess their status under the regime. This may involve making one of the special elections. Documentation such as prospectuses and offering memorandums may need to be updated.
Where are we now?
The rules are live and have been in place since 6 April 2019. During September and October 2019, HMRC consulted on a set of technical amendments to the legislation. This consultation is now closed, and the outcome is awaited. Major policy change is not anticipated and it is expected that HMRC will release updated guidance in the coming weeks.
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