Extension of scope of Non-Resident Capital Gains tax

Extension of scope of Non-Resident Capital Gains tax

Since April 2015, all non-UK resident individuals, closely held companies, trustees, personal representatives and funds have been subject to Non-Resident Capital Gains Tax (NRCGT) when disposing of UK residential property.

With effect from April 2019, the scope of NRCGT will be expanded to also cover disposals of

• Non-residential (i.e. commercial) UK property; and
• “Substantial” interests in “UK property rich entities” – referred to as “indirect disposals” (see below).

Non-resident diversely held companies, widely held funds and life assurance companies will also be brought into the scope of NRCGT for the first time from April 2019. All non-UK resident companies, including close companies, will be charged to corporation tax rather than capital gains tax on their gains.

Where an asset is brought into NRCGT for the first time as a result of these changes, it can be rebased to its April 2019 market value, ensuring no gain arising prior to that date is subject to UK tax. Assets already in the scope of NRCGT (e.g. UK residential property) will continue to be rebased to April 2015.

A side effect of these changes, and one which may please many tax advisers, is that Annual Tax on Enveloped Dwellings (ATED)-related CGT will be abolished from April 2019, although the standard ATED annual charge continues.

Indirect disposals and NRCGT

The provisions for indirect disposals are complex and are intended to catch, for example, the situation where a non-resident sells shares in a company which holds UK land as an investment.

For an indirect disposal to be subject to NRCGT, the following conditions have to be met:

• The disposal has to be of a right or interest in a “property rich” company – broadly one which, at the time of disposal, derives at least 75% of the total gross market value of its assets from interests in UK land; and
• The non-resident investor must have a “substantial indirect interest” in the UK land – broadly at any time in the two years prior to disposal they (together with certain connected parties) had at least a 25% investment either directly, or indirectly, in the “property rich” company.

There is a helpful exemption – if all of the UK property (or all but an insignificant value) has been used for trading purposes throughout the year leading up to the disposal, and it is reasonable to conclude it will continue to be so used after the disposal, then the NRCGT rules won’t apply. This should mean for example that most investments by non-resident investors in UK retail and hospitality trading businesses are exempt.