FLASH BUDGET UPDATE: all UK commercial real estate gains to be taxed

The Government announced today significant changes to the UK taxation of capital gains realised by non-residents from disposals of UK property.

Contrary to the stated intentions regarding the tax treatment of capital gains on UK commercial property held by non UK corporates, following the consultation which ended in the Summer, the Government announced today that with effect from April 2019, capital gains accruing on commercial property will be subject to UK tax for both non-UK tax resident individuals and non-UK tax resident corporates at the same rates applicable to the corresponding UK resident. The initial charge from April 2019 will be to UK capital gains, with a move to UK corporation tax from April 2020.

The rules are intended to apply to both direct disposals of UK property, and indirect disposals of UK property by way of selling assets (eg shares in a company) which derive their value from UK property.

Indirect disposal rules will apply where an entity (referred to as an “envelope”) is “property rich”, which is broadly where 75% or more of its gross asset value at disposal is derived from UK immovable property (as well as direct property interests, this covers indirect interests, options and certain other arrangements). A charge will only be triggered where the person holds or has held at some point within the five years prior to the disposal a 25% or greater interest in the property rich entity. The 25% threshold will take account of connected persons and persons acting together.

The charge on direct and indirect disposals will only apply to gains which arise from April 2019 based on market value rebasing as at that point.

In addition, the Government has announced that it will extend the scope of capital gains tax on UK residential property so that it applies to direct disposals by widely held companies (removing the existing exclusion for disposals by such companies), as well as indirect disposals. Where non-residents are currently within the charge to existing non-resident capital gains tax (NRCGT) the earlier rebasing point of April 2015 will continue to apply to direct disposals of assets.

The aim of the legislation is to align the tax treatment of non UK tax residents with that of UK tax residents. In the case of UK corporates there is also an intention to abolish the benefit of indexation allowance on gains, so gains falling within the new legislation will in all likelihood be taxed without taking into account the effect of inflation. In addition, as noted above, it was announced today that, from April 2020, non-UK corporates holding UK immovable property will be brought within the charge to UK corporation tax on both income and gains.

There will be exemptions from the charge where the property is owned by pension funds or other exempt investors. To the extent possible, there is likely to be a focus on transferring properties into a UK Real Estate Investment Trust (REIT) structure to mitigate the potential effect of these provisions. 

More detail on this will follow as part of the Simmons & Simmons in depth analysis on the Budget measures.