Friday 6 July (so-called 'L-Day') saw the Government issue the eagerly awaited legislation and guidance regarding the taxation of gains from UK land for non-residents. This follows the announcement last year that non-residents would be brought within the scope of UK tax on gains made on the disposal of commercial property, in addition to the capital gains tax (CGT) they have been subject to on disposals of residential property since 2013/2015.
The legislation reveals that the crux of the proposals has not changed: non-residents will now be subject to tax on gains arising from disposals of (i) UK land interests (now to include commercial property) and (ii) assets which derive 75% of their value from UK land, where the person disposing has a "substantial indirect interest" in that asset. A "substantial indirect interest" broadly means that the person has held at least a 25% interest in the asset at any point in the previous two years. The second limb is clearly aimed at taxing the sale of shares in "property rich" companies and units in offshore unit trusts.
The proposed rebasing of assets from April 2019 remains and there are some helpful changes. For example, the sale of shares in an entity which owns land falls outside of the scope of the rules if the land has been used in the trade for 12 months (useful for retailers or hotels operators, depending on their structure). The overall CGT code has also been simplified, with Annual Tax on Enveloped Dwellings (ATED)-related CGT now repealed due to its redundancy.
The position of exempt investors and funds is clearly one where further consultation is required. For example, HMRC accepts that a pension fund which is a unitholder in an offshore unit trust holding UK land (a common structure) would suffer tax leakage if the unit trust were subject to CGT on the disposal of assets. It has therefor been suggested that such an entity may elect to be treated as tax transparent for these purposes, allowing tax exempt investors to utilise their tax exemptions on such disposals.
Another proposal is to allow widely held funds to elect that gains made by the fund are exempt, provided that certain reporting requirements are met. Each investor would then pay tax on gains when they dispose of their interest in the fund. Less helpfully, the new rules may apply to all investors in a fund, even if they hold less than a 25% interest.
This space will continue to need to be carefully watched as the full ambit impact of the rules becomes apparent.