Tax shake up hits UK property from all angles

Barring any radical Budget rethink, there are some significant property tax changes from 6 April 2020, which could have a widespread impact on those owning residential investment property.

Capital Gains Tax & lettings relief

The reporting regime for UK residents selling residential property will be accelerating.

Where tax is due from 6 April 2020, it will need to be declared and paid via an online form within 30 days of completion.

Also, after 5 April 2020 only the final nine months of owning a residential property will be treated as if you lived there, even if you were absent. This qualifying period has been 18 months for a while. Therefore, absent owners could become liable to Capital Gains Tax (CGT) sooner, and in a slow-moving property market, the impact of this change could be significant.

Finally, again from 6 April 2020, the qualifying criteria for ’lettings relief’ is being tightened. From 6 April 2020, this generous relief will effectively disappear for most landlords who were eligible for it previously.

All in all, the above changes could mean that, depending on your individual circumstances, selling your residential property before 6 April 2020 could be quite beneficial. After this date you and your conveyancing solicitor need to be aware of these changes, the very tight deadlines and the possible need for tax advice.

UK property owned by non-UK residents

Non-resident individuals (and in certain cases non domiciled individuals) using vehicles to hold and sell UK property are now also likely to be within the UK tax net under rules relating to ‘indirect ownership’. Changes have been afoot and introduced in a rather piecemeal fashion over the past few years for non-residents with ‘interests in UK land’ (defined very widely). The rules are complicated and we can provide more detail, but below is a flavour of the key points.

Offshore Property Developers

Since 5 July 2016, any non-UK resident individual or company has been subject to UK income tax or corporation tax on any profit made that is broadly attributable to a UK property trading activity (developing or dealing essentially). There are also ‘tracing’ rules to ensure that a profit made by selling shares in a property trading company, rather than selling the property itself, is still caught.

These changes do not affect the treatment of rental income paid to non-UK resident landlord companies if they fall within these rules and receive the rental income from UK properties but broadly where the company has no UK “presence”. In this case such rental income remains subject to income tax and is not taxed as part of the new property development trade. But, for companies where there is a UK presence, the rental income from properties held as part of its trade is subject to corporation tax.

Offshore Property Investors

From 6 April 2019 where a non-UK resident company holds UK property only for investment purposes (i.e. pure rental activity) and a capital gain is made from selling a property, this gain is now subject to UK corporation tax. Prior to 6 April 2019 any such gains were taxed under the ATED-related CGT charge.

Furthermore, capital gains made by non-UK resident individuals or companies made on or after 6 April 2019 are chargeable to Capital Gains Tax or Corporation Tax, whether the disposals are either ‘direct’ or ‘indirect’ disposals of UK land and whether residential or non-residential. ‘Indirect’ essentially means disposals of UK land through disposals of rights or interests in companies that derive at least 75% of their value from UK land.

The tight 30-day filing/payment deadline mentioned in the previous section also applies.

Currently, property investors who are either non-UK resident individuals or companies, are subject to UK income tax on any net income from a UK rental property business.

From 6 April 2020 all non-UK resident companies owning UK investment property and receiving rental income, whether commercial or residential, will come within the UK Corporation Tax rules. They are currently subject to UK Income Tax on (broadly) income. This has been largely driven by a desire to harmonise certain tax rules for offsetting losses, interest costs, etc.

One implication is that a new accounting period will start on 6 April 2020 for UK Corporate Tax purposes and any non-UK resident company currently paying UK Income Tax on rental income will pay this in full up to 5 April 2020. There are quite a few differences in the Corporation Tax rules compared to Income Tax rules which will need to be considered, as well as complex transitional rules.

Non-resident companies will need to register with HMRC for Corporation Tax and any non-resident company landlord needs to be planning for these changes now.

Please note that this is only a summary of some of the main issues and, as the legislation is complex, this should not be construed as advice.

For further information and advice, please call Jon Miles on 01225 325580 or email jm@richardsonswift.co.uk.