The following is of interest to investors in and developers of residential real estate in the United Kingdom; to banks and other financial institutions that may hold an interest in residential properties following exercise of security or, prior to exercise of security, as part of “alternative financing arrangements”; to organisations that provide residential accommodation to staff, for example expatriate executives; and to anyone else who holds interests in residential property.

Overview

Why is this significant?

Unusually among developed countries, the UK does not generally seek to tax capital gains arising to non-UK residents in respect of real estate in the UK.  That will change from April 2015, when non-UK residents will generally be subject to capital gains tax or corporation tax on capital gains arising on the disposal of residential properties in the UK.  It is not proposed that commercial properties would be within the new rule.

This change is in addition to the extension of “anti-enveloping rules”, including capital gains tax for certain vehicles holding residential property, the scope of which was recently extended but which are more narrowly targeted than this announcement.

Why are you sending this bulletin now?

The new rule was headlined at the end of last year in the Government’s “Autumn Statement” on the UK’s finances, but the announcement was anodyne and no details were available.  The Government has now published a consultation document (the “Con Doc”) seeking feedback from interested parties on various aspects of the proposed new rule.

Although the Con Doc is in effect merely part of an information gathering exercise on the part of the Government and does not constitute an official announcement or clarification of the new rule, nonetheless certain aspects of the Government’s likely approach are implicit (and in some cases explicit) from it.  It is the first substantive “heads up” on the circumstances in which the new rule may apply.

Key Points From The Con Doc

What sort of entities will be caught by the new rule? Will it be restricted to individuals?

The Government intends that the new rule will apply to legal entities (companies, partnerships) as well as to individuals.

REITs will remain exempt, and the Government is considering exempting funds which satisfy a “genuine diversity of ownership” requirement. It is hoped that this would extend to exempting intermediate holding vehicles established by such funds to hold their property investments, but this point is not addressed in the Con Doc.

What rate will tax be charged at?

For non-resident companies it appears likely that the rate will be similar to the rate of corporation tax which would apply to a UK resident company (other than a REIT). This will drop to 20% in April 2015.

For individuals the current intention is to apply the 18% and 28% capital gains tax rates, depending on the individuals’ level of UK source income and gains. This will mirror the treatment of UK resident individuals.

Will the new rule apply to residential properties held for commercial purposes?

It seems clear from the Con Doc that properties which are held as investments and let on a commercial basis will not be exempt. Other types of commercial activity involving residential properties, such as development, are not specifically addressed but given that the policy objective appears to be to align the UK tax treatment of UK resident and non-UK tax residents, it seems unlikely that there will be exemptions for commercial activities generally. The Government does however intend to exempt certain types of communal dwelling, such as halls of residence (but not student accommodation more generally).

Next Steps

The Government has requested responses to the questions raised in the Con Doc by 20th June 2014. It is then likely that a summary of those responses will be published, which may give further clues as to the Government’s thinking and in particular whether its thinking has changed at all as a result of the responses received.

Legislation will be enacted as part of Finance Act 2015, likely in the summer of 2015, but the new rule will take effect from April 2015.

IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this informational piece (including any attachments) is not intended or written to be used, and may not be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.