Navigating new taxation requirements for non-resident investors in UK real estate 6 July 2020

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Simon Vardon

Director, Product Development – Real Assets

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There are several significant changes for investors and their service providers to consider at present. In addition to understanding the tax changes, the practical aspects of compliance require careful planning. This briefing note is designed to provide an overview of the key changes and some practical considerations.

Non-residents are now subject to the taxation of gains arising from UK real estate (from April 2019) and subject to Corporation Tax (from April 2020)

From 6 April 2019, disposals by non-residents of UK commercial real estate became chargeable to UK taxes. For a 12-month period to 5 April 2020, this charge was to Non-Resident Capital Gains Tax (NRCGT). From 6 April 2020, with the transition of Non-Resident Landlords to Corporation Tax, the gains form part of ongoing corporation tax return filings. The charge applies to both sales of the real estate itself, and of indirect interests in property vehicles which derive at least 75% of their value from UK real estate. Other than for collective investment vehicles, the charge for indirect disposals only arises when there is more than 25% ownership. Non-residents owning residential property directly or indirectly are liable to tax in the same way. Rebasing to the value at April 2019 (for commercial property) is generally available on the first disposal, so gains arising before then are not taxed.

Popular structures used

Non-resident investors into UK commercial real estate may well have structured their investment through an overseas Collective Investment Vehicle (CIV) such as a Jersey Property Unit Trust (JPUT). These structures have proved popular over many years owing to their simplicity, flexibility and ability to unitise investments into an asset which is typically high-value and indivisible if acquired directly. JPUTs have always been treated as tax opaque non-UK resident companies for capital gains tax, so are caught by the new capital gains regime for non-UK residents.

Due to the adverse impact of the new NRCGT rules on indirect disposals, and particularly due to the risk of multiple layers of taxation on the same proceeds of sale, HMRC introduced special regimes for CIVs, enabling them to make transparency and exempt elections, subject to conditions.

The effect of the transparency election (available to income transparent CIVs such as JPUTs and Luxembourg FCPS) is that for NRCGT purposes, the CIV becomes treated as a partnership with no taxation at the level of the CIV. This is particularly attractive to JPUTs where there are exempt investors (such as pension funds, charities and sovereign wealth funds) as they will end up being able to take advantage of their exemption and enjoy the same capital gains treatment as if they had held the real estate itself. The election is irrevocable, and all the investors must consent to the making of a transparency election.

The other election possibility is the exemption election. This enables a widely held CIV to be treated as tax exempt, and it applies to other vehicles in the structure too, including 100% owned subsidiaries. The election can therefore be useful in eliminating taxable gains held in SPVs as indicated below.

In the case of CIVs, subsequent to either election being made, tax is payable at the level of the investor and there are compliance rules which must be observed to avoid penalties.

Given the number of changes all taking place at the same time, we will consider the transitional and new taxation and filing requirements on a typical CIV structure:

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In the above example:

  • The structure is a joint-venture type arrangement (typically with 2 investors)
  • One of the investors is an exempt institutional investor, investing via a corporate feeder vehicle (just for the purpose of this example)
  • Both unit trusts have made a transparency election
  • The PropCo Unit Trust owns a commercial real estate asset located in the UK
  • The corporate feeder and the other investor are registered under the Non-Resident Landlord Scheme (NRLS), filing annual returns to HMRC with regard to their net rental income
  • The JPUTs prepare financial statements annually to 31 December

This is a fairly typical structure facilitating overseas capital investment in UK real estate. JPUTs such as these should, over the last year, have been making an exemption or transparency election. The making of the transparency election, will also be the overwhelming course of action taken by the Trustees of joint venture-type JPUTs. In the above example the election will have been particularly important to the investor with exempt status. The elections only impact capital gains.

The switch for non-resident landlords from income tax to corporation tax from 6 April 2020, brings a host of matters to be addressed.

Non-Resident Landlord returns

The registered non-resident landlords will need to make a final return to HMRC:

  • For the year to 5 April 2020
  • Due to be filed with HMRC by 31 January 2021
  • A payment on account may be due by 31 July 2020, with final payment made by 31 January 2021

This will conclude the filings under the NRLS, unless the company has other UK income chargeable to UK Income Tax.

Corporation Tax (CT) returns

For the existing non-resident landlord entities that had an existing UK property business at 5 April 2020, HMRC will automatically register the companies for Corporation Tax and issue Unique Taxpayer References (UTRs).

Taxpayers should contact HMRC if they have not received their UTR by 30 June 2020 or already have a company UTR.

The former non-resident landlords will need to note the following:
  • Confirm their accounting year-ends with HMRC (if different to 5 April)
  • Register with HMRC Online Services (only online CT filings are possible)
  • Make plans for the annual accounts to be iXBRL tagged in line with HMRC taxonomy, as required when submitting the tax return
  • Draw-up a first CT return for the period from 6 April 2020 until the end of the accounting period for subsequent years, the accounting periods for corporation tax begin and end on the same date as the company accounts
  • Comply with the new Corporate Interest Deduction Restriction rules, hybrid mismatch rules, derivative rules (for swaps), which may be applicable
  • File with HMRC within 12 months from the end of the accounting period
  • Pay any corporation tax due nine months and one day after the end of the accounting period
  • Thereafter file returns for 12-month periods, in line with the accounting year-end
  • Existing agent authorisations will not transfer. Companies wishing to retain the services of an existing agent for corporation tax will need to authorise that agent to act for them in respect of corporation tax
  • Carried forward capital allowances pools and losses pass into the new regime

Non-resident companies will not have to register for corporation tax and file a company tax return for an accounting period if the liability to corporation tax is fully offset by tax deducted under the non-resident landlord scheme and it has no chargeable gains for the period.

There are obligations under the old NRLS and the new CT requirements which seem to straddle each other in 2020/21, so care is needed to ensure all obligations and deadlines are met. The compliance requirements do not end there either. Having made a transparency election, the JPUTs, from 6 April 2019, are treated as partnerships for capital gains purposes.

Partnership Tax returns

A CIV that makes a transparency election is required to file an annual partnership return regardless of whether any partnership property has been disposed of. This new obligation falls on the JPUTs themselves that have made a transparency election. The required partnership return:

  • Would run for the year from 6 April 2019 to 5 April 2020
  • Is due with HMRC by 31 October 2020 (if a paper tax return), or by 31 January 2021 (if filed online)
  • The content of the return will be limited to gains arising from UK real estate and include details on the investors and the disposals made
  • The return does not need to include any information in relation to the income of the CIV

HMRC also continue to refine and clarify some of the finer detail.

In particular, the UK Property Rich Collective Investment Vehicles (Amendment of the Taxation of Chargeable Gains Act 1992) Regulations 2020 has introduced a number of refinements, most of which follow from industry feedback as the detail of the new UK property rich CIV regulations is worked through. One favourable change that would be relevant to the structure in our example above is that the Corporate Feeder would likely benefit from the extension of scope of paragraph 33; “Exemption for disposals by companies wholly owned by certain investors” by Regulation 13, whereby if the investors meet the definition of qualifying institutional investors, the disposal by the Corporate Feeder of units in the CIV which has made a Transparency election, is not considered a chargeable gain.

OUR VIEW

It is important for investors and asset managers to work closely with their tax advisors and administrators to achieve compliance with the new requirements during such a busy transition period. That is both the transition to corporation tax and the making of and impact of the transparency and exempt regimes. Sometimes both regimes are available. In the past 12 months CIVs like JPUTs have focused on which election they are eligible for and which they wish to make. The coming months now need to be spent focusing on the resultant deadlines, filings and potentially also whether the elections can be usefully combined.

With the advent of COVID-19, it is also worth noting that there is an extension to the timeframe for making the NRCGT elections for entities which were in existence at 6 April 2019. The deadline has been extended to 1 October 2020. Advice on which elections might be applicable and whether to make an election, should be sought urgently by all CIVs if this question has not yet been addressed.

HOW CAN WE HELP?

SANNE can provide the full range of services to comply with the obligations under the law.

SANNE’s team of Real Assets experts spans a global office network. The team have a proven track record in assisting clients and entities administered through new taxation and compliance requirements. We take an active role in industry consultations and disseminating our knowledge into the market, including presenting external training events. We take pride in our ability to deliver the solutions required by our clients to support their real asset investment structures, in an ever-evolving industry.

Should you require any further information, have any comments or queries about the new taxation laws, please contact us:

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