The draft Finance Bill 2019 was published last Friday (6 July) together with consultations on some of the proposed changes which will run until 31 August.
The document runs to 222 pages and we have summarised the proposals of most relevance to our private clients below. The legislation will be effective from 6 April 2019 but at the moment could still be subject to change.
Non residents owning U.K. property
The draft legislation seeks to extend HMRC's ability to tax non-residents on UK immovable property from its existing regime which applies only to UK residential property to most investments in UK land.
Currently HMRC does not tax non-UK resident investors on disposals of UK commercial property. The new draft legislation seeks to change the legislation so that gains arising from April 2019 will be subject to tax.
A disposal of an interest in a "property rich" company will also be taxable. A property rich company being a company where 75% or more of its gross asset value derives from UK land and the non-resident has held a 25% or more interest in the entity within the two years prior to sale. A trading exemption is in place in order that real estate heavy businesses such as hotel chains and retailers are not caught.
Rebasing will be available to April 2019 (April 2015 for residential property) and the capital gains tax rate will be 20% for an individual. A corporate will pay corporation tax at 19%. HMRC are seeking to synchronise the new rules with the existing regime for residential property held by a non UK resident and will be abolishing ATED CGT on disposals of residential property. ATED CGT is currently chargeable at a rate of 28% on residential property held by a corporate and therefore the abolition will represent a decrease in the tax rate to 19%.
There is still some uncertainty as to how these measures will impact the funds industry and further details will be provided at a later date.
A further change for corporate overseas landlords from April 2020 will be a switch from paying income tax on rental profits to corporation tax. The movement of these entities into corporation tax means that the corporation tax rules on interest deductibility and loss restrictions will apply. HMRC have confirmed that any carried forward income tax losses can be carried forward as corporation tax losses.
Sale of U.K. property
The draft legislation proposes that the current system whereby a non-resident must file a Non-resident capital gains tax return and pay the capital gains tax due within 30 days of the disposal of UK residential property will be extended. The legislation which would be effective from April 2020 is drafted so that UK residents will also be required to file a return within 30 days of a disposal of residential property and pay the capital gains tax due. This new regime will include the disposal of all residential property (not just property situated in the UK) unless the taxpayer is a remittance basis user or the property is subject to tax in another jurisdiction as a result of a double tax treaty.
12 year look back for offshore matters
Under the existing legislation, where there is a loss of tax, HMRC can make an assessment of tax at any time not more than four years after the end of a year of assessment or six years if a taxpayer has failed to take reasonable care. In cases where the omission is deliberate the time limit for assessment is 20 years. The draft legislation proposes to extend the four and six year time limits to 12 years where the transactions involved are offshore.
The extended look back period is not available to HMRC where information received under Common Reporting Standard is sufficient for HMRC to raise an assessment. The US does not participate in CRS and therefore individuals who have investments in the US are likely to be exposed to the longer assessment period. The legislation does not allow HMRC use their extended powers to go back further than 2013/14 where the loss of tax has been bought about due to careless behavior or otherwise 2015/16 and therefore the full impact of this will not be apparent for a few years.
Under existing legislation Entrepreneurs Relief is available to reduce the capital gains tax rate to 10% on the sale of a business provided certain conditions are met. One of the conditions is that the taxpayer owns a minimum of 5% of the shares. It is sometimes the case that new shares are issued which dilute existing shareholdings such that Entrepreneurs Relief is no longer available on sale. The draft legislation will allow individuals to make an election to treat the shares as disposed of and immediately reacquired at the point that they drop below the 5% ownership threshold and claim Entrepreneurs Relief on the gains accruing to this point. It will also be possible to make an election to defer payment of the tax on the gain qualifying for Entrepreneurs Relief until the shares are disposed of.
If you would like to discuss any of the issues raised and how they will affect you please contact your usual Frank Hirth adviser.