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UK Reduces Scope Of New Property Gains Tax

Friday, August 8, 2014

The British Property Federation (BPF) and the Chartered Institute of Taxation (CIOT) have welcomed an announcement from HM Revenue and Customs (HMRC) that institutional investors and companies with diverse ownership will be excluded from plans for a new capital gains tax (CGT) on UK properties sold by non-residents. The charge will come into effect in April 2015 and apply only to gains arising from that date.

Unlike other countries that collect tax on gains relating to disposals of residential property located within their jurisdiction, the UK does not generally charge CGT on disposals by non-residents. This means that any gain made by a non-resident individual on UK residential property is either taxed in the individual's home country or not taxed at all. In contrast, UK resident individuals are subject to CGT on disposals of any residential property that is not their primary residence, including on the gains made on any residential property they own abroad. The taxation of gains made on residential property that is owned in other ways by UK persons – through trusts, companies, and funds – is either subject to UK CGT, or UK corporation tax (CT), depending on the nature of the investment and the structure involved.

Welcoming the decision to exclude institutional investors and companies with diverse ownership, the BPF noted that it had warned that the proposed concessions did not adequately reflect the diversity of investment structures used by widely-owned institutional investors. It said that this could threaten investment into the UK's real estate market, in particular into the private rented sector and build to rent. The BPF highlighted that widely held institutional investors need to be encouraged to put their money in the UK and that a blanket extension of capital gains tax could be an unwelcome deterrent.

The Government now intends to set the scope for the new tax by reference to a form of 'close company' test, drawing on existing legislation, as suggested by the BPF in its consultation response.

Ion Fletcher, Director of Policy (Finance), British Property Federation, said: "We are thrilled that the Government has recognised that large-scale institutional investment is crucial to increasing the UK's housing supply, and that imposing capital gains tax on overseas funds could be detrimental to the economy. We are currently facing a housing crisis and it is important that government maintains a stable tax environment to attract overseas capital, which will help deliver economic growth. However, much work remains to be done on the all-important details of the new tax and we will continue to engage with government to ensure that overseas investment is safeguarded."

"Our consultation response outlined particular concerns about the impact of government proposals for investment in the nascent build-to-rent sector, which has so far relied on overseas institutional investors for a number of significant projects, so this announcement is reassuring in that respect," he concluded.

Meanwhile, Patrick Stevens, CIOT Tax Policy Director, commented: "The Government are understandably eager to ensure that the tax treatment of non-residents that own and make gains on UK residential property is comparable to that of UK residents. We also recognise the Government's desire to encourage institutional investment, domestic and overseas, in the UK's housing market and so it makes sense to exempt these groups from the charge."

"However, problems remain with the legislation specifically regarding Principal Private Residence (PPR) and the Annual Tax on Enveloped Dwellings (ATED). In their plans to extend CGT to non-residents in certain circumstances, HMRC's proposal to withdraw the PPR election for all taxpayers continues to alarm the Institute. If the plans were to go ahead, then UK residents could be faced with CGT charges on their first or second properties, with no certainty as to which is which."

CIOT has also called on the Government to abolish Annual Tax on Enveloped Dwellings (ATED)-related CGT for disposals from April 2015. Such gains would be within the scope of the proposed new charge CGT charge on non-residents, and there is no need for the complication of an additional system of charge, it said.

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