Expat buy-to-let landlords holding UK property will be hit with a non-resident property owner’s tax from April 2019. But, is there anything they can do?
The measure will affect expat buy-to-let owners who were not caught by the introduction of capital gains tax (CGT) for non-resident owners, which came into effect in 2015. The incoming measure was tucked away in the Autumn Budget and is designed to close a loophole where property could be held through low-tax offshore structures.
UK tax will, therefore, apply to the disposal of all UK commercial and residential property by non-UK residents. There will also be a UK tax charge where a non-UK resident realises a gain on the disposal of a 25% or greater interest in an entity which derives, directly or indirectly, 75% or more of its gross asset value from UK property. Gains will be taxed from April 2019 but historic gains will be excluded. For residential property already within the scope of the non-resident CGT regime, gains from April 2015 will continue to be taxable.
A flurry of sales?
Elliot Weston, a tax partner at law firm Hogan Lovells, said the move brings the UK in line with other jurisdictions.
“The UK is practically the only developed country in the world not to charge tax to non-residents on the disposal of commercial property located in its jurisdiction. Most double tax treaties allocate taxing rights on immovable property to the state in which the property is located.
“It has been a feature of the UK property market for several years that overseas investors, particularly from China and the Middle East, have dominated the acquisition of high-value commercial UK property. Much of this investment is held through offshore structures, such as non-UK resident companies and unit trusts.
“We may see a flurry of sales and restructurings in 2018, but many investors are long-term holders of UK property.”
Overseas pension funds registered in the UK will continue to be exempt from CGT on disposal of UK property investments or interests in UK property rich entities.
Also, companies that are at least 80% owned by qualifying institutional investors; such as pension funds, life assurance companies and investment trusts, will be able to benefit from the substantial shareholdings exemption when disposing of a 25% shareholdings in property-rich companies.
Weston advises investors look at onshore structures for holding UK property. The proposed reduction in UK corporation tax to 17% from April 2020, will mean that a UK holding company may be a simple and relatively attractive option. Alternatively, there are tax-exempt vehicles like open-ended property funds (Paifs) or listed property companies (Reits). One likely impact of the change is that investors will look closely at converting existing joint venture vehicles and funds into UK Reits. A consultation on aspects of the legislation is open for comment until 16 February 2018. For individuals, it asks whether it is right to harmonise annual tax enveloped dwellings (ATED)-related CGT given the changes proposed and whether there are any issues created by harmonising the ATED-related CGT rules and how can they be addressed? HM Revenue and Customs are also interested to know if the proposals mean that individuals would be required to pay CGT for the first time.
The war on Buy-to-Let
According to the study published by S&P Global on Thursday, this latest tax measure could push some landlord properties over the edge.
Branding the slash in benefits for landlords as a “war on buy-to-let”, report authors Alastair Bigley and Feliciano Pereira have identified buy-to-let mortgages taken out between 2014 and 2016 as most at risk.
Those mortgages may not be able to refinance because of new affordability requirements. In a sample, 81% would struggle to find the same leverage and would need to lower their loan to value ratio by 9.4%.
Options to sell and buy elsewhere have also been curtailed by the three-point stamp duty surcharge introduced in 2016.
Bigley and Pereira do not foresee a fire sale in the UK property market, which will not feel the full effect of the changes in tax until 2021, but they do expect the balance of power in the market to move toward owner occupiers and a cooling in prices.