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.