Non-residents asked to pay more CGT

Since 6 April 2019 all UK commercial property held or owned by non-resident individuals, offshore companies and trusts will have to pay UK Capital Gains Tax (CGT) at a rate of 19% or 20%,when the property is disposed of.

The new regime additionally applies to indirect disposals of UK commercial property.

Indirect disposals

These include disposals where, for example, a non-resident holds a property through a company and the shares, rather than the underlying property, are disposed of.

For an indirect disposal to be taxable, two tests must be met at the date of the disposal/sale:

1. The “Property Rich” test; and
2. The “Ownership” test.

“Property Rich” test

This test will apply if at the time of the disposal at least 75% of the value of the asset to be sold derives from UK property.

Where the company directly holds UK land, the 75% test should be relatively straightforward, but the calculation will become more complex where the company holds interests in other companies which themselves hold UK land.

“Ownership” test

This test will apply where the non-resident making the disposal, together with related parties, holds (or has held in the last two years) a 25% or greater interest in the company. This provision was included to prevent smaller investors who may have insufficient knowledge of the entity they are investing in from having to pay tax.

Targeted Anti-Avoidance Rule

In line with recent practice regarding new tax legislation, a widely drafted targeted anti-avoidance rule (TAAR) has been incorporated into the Taxation of Chargeable Gains Act 1992 with the intention of avoiding loopholes and ensuring that HM Revenue and Customs collect the maximum tax possible.

The TAAR applies to ‘any arrangements’ entered into by the taxpayer where the main purpose, or one of the main purposes, of such arrangements was to secure a tax advantage.

An example of where the TAAR would apply, is if there is a change to the company’s assets made immediately before the non-resident’s disposal of shares, in order to fall outside the scope of the “property rich” test.

If you would like to discuss how the new rules on commercial property may affect you, please get in touch with us by contacting one of our solicitors in the Wealth Planning team here.