Two major tax changes will affect non-UK residents that own commercial property in the UK.
Firstly, sellers of commercial property held by non-UK residents are now subject to capital gains tax, which is a tax on the gain calculated from the property’s value on 1 April 2019. Secondly, non-resident property companies will be charged corporation tax, rather than income tax from April 2020.
Tax changes for non-UK residents
First, disposals of commercial property held by non-UK residents are now subject to capital gains tax, with gains calculated from the property’s value on 1 April 2019. This follows the extension of the capital gains regime to the sale of residential properties owned by non-residents, that was introduced in April 2015.
Second, from April 2020, non-resident property companies will start being charged corporation tax, rather than income tax. This will increase the tax bills faced by many, because the calculation of taxable profits is different under the corporation tax rules. The most damaging issue is that tax deductions for financing costs will be capped. There will also be reduced scope to use carried forward losses to mitigate tax bills.
As a result of the capital gains change, commercial property values at April 2019 will be important to non-residents for years to come. Any increases in value before that date will not be taxed, whereas increases after that date will be on disposal.
Taxpayers are not allowed to time-apportion a gain before and after April 2019. So, non-residents are recommended to obtain a professional rebasing valuation of their commercial property at April 2019 from a chartered surveyor. This will ensure that if there is a future disposal, then the information needed to calculate the tax charge and demonstrate this to HM Revenue, will be readily available.
It will be more straightforward and cost-effective to obtain property valuations near to April 2019, rather than waiting until a disposal happens. And a valuation prepared close to that time is less likely to be challenged by HM Revenue, and will be easier to support, than one which is prepared years later.
It is also sensible for non-resident owners to review past expenditure records to identify costs relating to the purchase of the property and any enhancement works which can reduce a future chargeable gain.
In the past, many offshore owners have used interest on borrowings to reduce their tax bills. Therefore, they had little need to claim tax reliefs such as capital allowances. From April 2020 a much greater focus on capital allowances will be needed to ensure that each commercial property investment is as tax efficient as possible.
A full review of property acquisitions and capital expenditure projects must be carried out to ensure potential reliefs are maximised and realised. A portfolio review is not necessarily limited to recent years and in many cases, properties acquired many years ago will yield significant overage claims.
Additionally, land and buildings that require clean-up from contamination such as asbestos, hydrocarbons or Japanese Knotweed will qualify for Land Remediation Relief. This is only available under corporation tax and provides tax relief at a generous 150% of the money spent.