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Taxation of Capital Gains

Taxation of capital gains – scope extended by HMRC

HMRC extends the scope of the UK’s taxation of capital gains accruing to non-UK residents to include gains on disposals of interests in all UK property.

This measure was announced at Autumn Budget 2017 and a consultation ran from 22 November 2017 to 16 February 2018 under the title, ‘Taxing gains made by non-residents on UK immovable property’. HMRC and HM Treasury continue to correspond with respondents.

The draft legislation and a response document were published on 6 July 2018. This will be followed by a period of technical consultation before the legislation is finalised for Budget 2018.

The measure will have effect for disposals made on or after 6 April 2019 and the legislation will be introduced in Finance Bill 2018-19.

Part 1, and Chapters 5, 6, and 7 of Part 2, of TCGA will be re-written to accommodate the taxation of non-UK resident persons making disposals of interest in UK land. Apart from the changes to implement this measure the draft is a re-statement of the existing law and makes no change to the way the existing provisions work. Appropriate changes will be made to CTA 2009 in parallel to include non- UK resident companies.

Gains on disposals of interests in any type of UK land

All non-UK resident persons, whether liable to Capital Gains Tax or Corporation Tax, will be taxable on gains on disposals of interests in any type of UK land, whether residential or non-residential under the new section 1A(3)(b). The elections for the non-resident Capital Gains Tax rules not to apply for certain persons will be removed. UK land will be defined for this measure, using existing definitions.

The definition of residential land will be in a new section 1C, and will follow existing definitions under the Taxes Acts.

All non-UK resident persons will also be taxable on indirect disposals of UK land under the new section 1A(3)(c). The indirect disposal rules will apply where a person makes a disposal of an entity that derives 75% or more of its gross asset value from UK land. There will be an exemption for investors in such entities who hold a less than 25% interest. The gains on indirect disposals will be calculated using the value of the asset being disposed of, rather than the value of the underlying UK land. The indirect disposal rules will be incorporated in a new Schedule 1A to TCGA.

75% property richness test

The 75% property richness test will look at the gross assets of the entity being disposed of. Where several entities are disposed of in one arrangement, their assets will be aggregated to establish whether the 75% test is met. Any assets that are the counterpart to a liability in another entity in the arrangement will not be included – for example an intra-group loan credit balance in an entity would not be considered where the debtor is disposed of in the same arrangement.

There will be a trading exemption so that disposals of interests in property rich entities that are trading before and after the disposal will not be chargeable disposals where the land is used in the trade. This is likely to apply where, for example, a non-UK resident disposes of shares in a retailer which owns a significant value of shops.

All non-UK resident companies, including close companies, will be charged to Corporation Tax rather than Capital Gains Tax on their gains.

Existing reliefs and exemptions available for capital gains will be available to non-UK residents, with modifications where necessary. Those who are exempt from capital gains for reasons other than being non-UK resident will continue to be exempt.

Losses arising to non-UK resident companies under the new rules will be available in the same way as capital losses for UK resident companies. Capital Gains Tax losses will follow the existing rules for non-resident Capital Gains Tax losses.

There will be options to calculate the gain or loss on a disposal using the original acquisition cost of the asset or using the value of the asset at commencement of the rules in April 2019. Both options will be available for both direct and indirect disposals. Where the original cost basis is used to calculate an indirect disposal and this results in a loss it will not be an allowable loss. These will be incorporated in a new Schedule 4AA to TCGA.

Reporting requirements to be replaced

Reporting requirements for non-UK residents in TMA 1970 will be replaced by a new Schedule to the Finance Act and expanded to include the further types of disposal under the new rules.

Special rules will apply to collective investment vehicles investing in UK real estate who agree to certain conditions including reporting to HMRC, these rules will look to address concerns raised in the consultation over taxation of exempt and similar investors and multiple tax charges on funds. These rules are being explored in consultation with relevant stakeholder groups. Regulations may be used to define the reporting requirements.

The provisions relating to ATED-related Capital Gains Tax will be abolished.

If you require further help and advice, please contact us.

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