As the dust settles on changes to the non-domiciled regime and, moreover, changes to the way in which UK tax will dictate how non-UK-resident or non-UK-domiciled individuals hold UK property, is the UK, and London in particular, still as desirable a place to own a Mayfair pied-à-terre?
Tax on purchase
In the 2020 budget, Chancellor of the Exchequer Rishi Sunak announced plans for a 2 per cent stamp duty land tax (SDLT) surcharge for non-UK resident purchasers of UK residential property, in another attempt to discourage global high-net-worth individuals from using the UK property market as a financial instrument with huge returns and low risks. The surcharge will take effect from 1 April 2021. Taxpayers ought to be made aware that this prompts a test of residency at the point of purchase. It remains to be seen how these new rules will transpose into statute.
Tax on disposal
From April 2019, the disposal of any UK property (residential or commercial) held by a non-UK resident (individual or corporate) is within the scope of UK non-resident capital gains tax or corporation tax on chargeable gains where the disposal is by a non-UK-resident company.
More significantly, disposals of interests in companies whose value derives from an interest in UK land may also be chargeable to UK tax. The legislation refers to direct and indirect disposals, the former referring to an actual disposal of UK land and the latter giving rise to a tax charge where the asset actually disposed of is not UK land but rather shares in a company that holds UK land. No longer is the principle that companies are not transparent for UK tax purposes strictly observed.
Schedule 1 to the Finance Act 2019 (the Act) effectively rewrites part 1 of the Taxation of Chargeable Gains Act 1992, and applies where a non-UK resident holds an interest of 25 per cent or more in what is termed a property rich entity, or has done so at some point in the previous two years, ending with the date of the disposal. An entity is considered property-rich if, at the time of a disposal, 75 per cent or more of the value of the asset disposed of derives directly or indirectly from UK commercial or residential land. The 75 per cent test looks at the gross asset market value of the entity at the time of the disposal without any deduction for loans. A disposal might be of the interest in the entity directly, or it may be a disposal of a holding company or an interest in a trust or structure that, when looked at together, meets the property-rich test.
Note the potential for the same economic gain to be taxed twice if a non-resident shareholder disposes of their shares and the company then disposes of the property that is taxable on the company.
Inheritance tax
When considering inheritance tax (IHT) exposure, there remains a difference in treatment depending on whether the property is residential or commercial. Irrespective of whether it is commercially let, residential property held via a non-UK company whose shares are not UK-situs assets, and so were once considered to be excluded property for IHT purposes and outside the scope of IHT, are now within the IHT net, according to sch.A1 of the Inheritance Tax Act 1984 (the 1984 Act). The 15 per cent SDLT rate introduced in 2012 for the purchase of enveloped dwellings and the 2013 introduction of the annual tax on enveloped dwellings clearly did not do enough to discourage this common
tax structuring technique used by non-UK-domiciled individuals. It is important to note that IHT mitigation through the use of a non-UK company when it comes to purchasing and holding commercial property is still possible.
Going forward
The changes brought in by the Act are a clear step to try to align the tax treatment of UK residential and commercial property and a further move to eliminate tax advantages available by using corporate structures. Perhaps the next step will be to extend sch.A1 to the 1984 Act to cover commercial property as well. As the changes have been piecemeal, the legislation in this area remains disparate and complex, and great care is required.
