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Non-resident Investors – The Three-Month Property Supermarket Trolley Dash

The chimes at midnight this week meant more for UK non-resident investors than simply a new year – it marked the countdown to new rules coming into force on the payment of Capital Gains Tax Read more...

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The chimes at midnight this week meant more for UK non-resident investors than simply a new year – it marked the countdown to new rules coming into force on the payment of Capital Gains Tax on commercial real estate.

Changes to the Law

In autumn 2017, Chancellor Philip Hammond announced that as of 6th April 2019 Non Resident Capital Gains Tax (NRCGT) would be payable on all types of UK real estate by non-resident investors. The current rules only apply NRCGT to residential property, acting as an incentive for multinational groups to hold UK commercial property through offshore structures, normally in low tax or no tax jurisdictions.

April’s rule change is designed to equalise the position of UK and non-UK based investors as it creates a single regime for disposals of commercial and residential real estate. The tax will be applied to any increase in value after the date of April 6th and will be charged at the corporation tax rate. The changes could mean a sizeable increase to HMRC’s coffers as just this week CBRE published research revealing that over the past 20 years foreign buyers have invested £144.3 billion in London commercial property.

For proactive non-resident investors, there will be a short window of around three months to seek to increase the value of a commercial property before 6th April possibly by regearing leases, obtaining planning gain and enhancing properties to increase their value.

The rule changes will apply to both direct and indirect disposals, meaning CGT will also be applied to the sale of shares in ‘property rich’ companies by investors who in the previous two years have held at some point a 25% interest in the equity. It is worth noting that the 25% ownership test will not apply to Collective Investment Vehicles (CIVs) that are UK ‘property rich’ and there are further exemptions for CIVs. Certain investment vehicles will remain exempt from the changes.

What can and can’t you do?

The normal anti-avoidance tax rules will apply to these changes, meaning now more than ever investors must ensure their property disposals are carefully conducted and they should ensure they seek sound legal and tax advice to navigate this new legislation.

However, one self-help remedy will be for investors to obtain comprehensive (Red Book) valuations of their properties as of 6th April 2019 as this figure will be the base figure for any calculation of gain. The valuations will provide certainty in the event of any challenge of any valuation by HMRC.

Adding value in a short time

Prudent investors will go one step further where possible. By proactively managing assets, the next three months can be used to increase the value of commercial assets. Avi Barr, a Partner in our Real Estate Team advises that “we are recommending to our clients affected by the changes that where their properties are let, they should look to settle rent reviews, renew or extend leases and conclude any lettings of vacant units. Similarly, enhancement of value by obtaining planning consent for development or change of use or even investing to improve properties will assist with the uplifting value before that all too crucial date this April comes around”.

Given the general economic uncertainty in the UK, non-resident investors with commercial property should do everything possible over the next three months to improve their position.

If you would like to discuss any of the topics raised in the above article, please call us on +44 (0)20 7936 8888, email on enquiries@lawstep.co.uk or contact a member of the team below.

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