Taxation of UK land and property for non-uk residents

Transcription

1 Taxation of UK land and property for non-uk residents Currently non-uk residents are not charged to tax on gains made on UK based capital assets, including land and property. Also UK property owning companies enjoy a much lower rate of stamp duty on transfers (0.5%) compared with stamp duty land tax chargeable on land transfers (the maximum SDLT rate being 5.0%) and furthermore, non- UK resident property owning vehicles can avoid both UK stamp duty and stamp duty land tax entirely. These issues are raised obliquely from time to time. Speculation has it that imposing these taxes on non-residents would be difficult to implement, but this article considers whether this is the case. Council tax and business rates apply to all UK land and property regardless of the residency of the owner, and collection does not appear to be not a problem per se. Also a number of countries impose property taxes equally on residents and non-residents, including special purpose vehicles, presumably with a degree of success. In light of the current economic difficulties and the size of the public sector deficit surely now is an appropriate time for the government to consider changing the law in order to raise extra tax revenue. UK capital gains tax is a matter of UK residency All income received by individuals which arises from within the UK is subject to UK income tax regardless of where the earner is resident and of his or her domicile. Non-UK domiciled but UK resident persons are now taxed in the UK on their worldwide income and capital gains as they arise, save in the event they elect for the remittance basis to apply. Non-domiciled individuals are also subject to UK inheritance tax on their UK situate property if they have been resident in the UK for 17 years out of the last 20 years prior to death under the deemed domicile provisions 1 and UK domiciled individuals (regardless of their residence) are subject to UK tax on their worldwide estate on death. UK capital gains tax for individuals is charged to UK residents or those ordinarily resident in the UK as well as in respect of non-uk residents carrying on a trade, profession or vocation in the UK through a branch or agency on the disposal of UK situated assets and used in, or held for the purposes of, such business. Relief against double taxation will be available either under any double taxation treaty or under the general provisions of unilateral relief. Ignoring the rules for UK non-doms, by and large the UK taxation system for individuals reflects standard provisions in most double tax treaties. However where the UK is not in step with a number of OECD treaty countries is the absence of a tax charged on capital gains arising from UK situate property, regardless of the owner s residence. For corporations a UK resident company is chargeable to UK corporation tax on its worldwide profits and capital gains 2. Non-UK resident companies which carry on a trade in the United Kingdom through a permanent establishment in the UK will also be chargeable to corporation tax on all its profits attributable to the UK permanent establishment including capital gains on UK assets related to the trade 3. There are special rules governing relief for losses on assets situated outside the UK. However non- UK resident companies which do not carry on a trade in the UK through a permanent established are outside UK capital gains tax on gains made on UK situate property. Most double taxation treaties entered into by the United Kingdom, and following the model OECD agreement 4, give each contracting state respective rights to tax income and 1 Section 267 IHTA 2 Section 5(1) CTA Section 5(3) CTA Model Tax Convention on Income and on Capital

2 gains from immovable property situated in that state 5. Countries differ as to whether they enforce this right through their domestic law but the UK does not. A number of countries do impose the CGT on non-residents in respect of land and property, including Australia, Canada, Cyprus, Hungary, Iceland, Ireland and Spain 6 and it is common for the tax to extend to property owning vehicles as well. Capital gains tax was introduced in 1965 by a Labour government as an anti-avoidance measure, to combat schemes whereby income became capital. There is a history of opposition to the tax on the grounds that it stifles investment and calls from time to time for its abolishment. At present capital gains contributes very little to the country s total tax take, but an alternative to abolishment is to increase it as a valuable revenue source. The UK system for CGT on non-residents is surely difficult to justify from an economic perspective and from any fairness test why should UK residents pay a tax for UK subject matter when non-residents are exempt? Gains earned on capital assets are often perceived as a tax on unearned income a windfall gain based on time and the cost of finance. If tax was to be imposed on gains arising from UK land and property irrespective of the residency of the owner, it is difficult to argue that it would reduce entrepreneurial activity in the UK any more so than any other tax arising on an investment activity, and where tax is included in the investor s calculation of its projected return on investment. The United Kingdom has a small land mass, resulting in relatively high underlying business and capital costs and residential property prices. UK land has a scarcity value which has attractions for property speculators and investors. London is one of the world s top three financial centres, with highly paid non-uk domiciled individuals contributing to the high value of residential property in the capital and who are able to make UK tax free gains on UK property disposals on leaving the UK. Possibly they may be taxed in their home territory on offshore capital gains but surely this is all the more galling for the UK taxpaying public. As the tax rules now stand the UK property market must be viewed as rich pickings for offshore based investors. An opportunity for raising tax for the exchequer UK capital gains tax on all types of capital assets raised 7.8 billion in , it is estimated to have raised 2.5 billion in and forecast to raise 2.6 billion in Whichever of those years in question one refers to, CGT raises only a small percentage of the UK total tax take. There is no breakdown on what proportion of corporation tax, which raised 43.1 billion in , reflected capital gains 8. The Institute of Fiscal Studies (the IFS ) estimated 9 that in some 350,000 individuals and trusts would pay capital gains tax and that 28% of total tax from capital gains arose from residences and other land and buildings 10. The main UK tax reliefs for CGT on property disposal are as follows:- principal private residence relief 11 ; intra-spouse transfers; entrepreneurs relief for business assets including land and buildings 12 ; 5 Article 22 6 As at Office of Budget Responsibility Budget Forecast June excludes tax credits - the national statistics office no longer provides a breakdown for capital gains for corporations, presumably due to its minor nature 9 See A survey of UK Tax System Briefing Note 9 updated by Stuart Adams and James Browne April 2009 using tax receipts data from the 2008 Pre-Budget Report 10 IFS The Green Budget 2008 Chapter Section 222 TCGA 12 Sections 169H to 169S TCGA

3 gifts of business assets including land and buildings a delaying relief 13 ; roll over relief for disposals of business assets including land and buildings and re-invested in other business assets another delaying relief 14 ; local authorities exemption for CGT 15 ; disposals by registered pension schemes 16. The relief for principal private residences is not restricted to UK property, but will only be of use to UK residence tax payers. Other tax receipts from UK property are much larger than CGT and therefore in taxation terms can be considered rather successful. Council tax on domestic properties, operated by local authorities throughout the UK, currently raises some 22.5 billion (paid either by tenants or owners), and business rates payable on non-residential properties bring in a similar amount ( 21.5 billion) 17. There are also a number of reliefs for these taxes 18 primarily related to assisting the less well off - however none are available per se for offshore owners. Both taxes are based on a valuation of the property in question and the collection is administered by local authorities. This article makes no attempt to quantify the potential tax which could arise by bringing non-uk resident property owners into the capital gains tax net, but the source for making any estimate would be to make use of the local authority registers. Regarding SDLT, which is charged on transfers of UK property as a proportion of the consideration and paid by the buyer, this raised 4.8 billion in and has potential to increase its contribution to the total tax take when the property market rises and if legislation was to be introduced whereby stamp duty is replaced with SDLT on the transfer of special purpose property owning companies (and regardless of residence). SDLT is paid by a self-assessment system but effectively enforced by the land registry offices (LRO) 20 which requires evidence of SDLT having been paid prior to re-registering the transferred property. Tax collection mechanisms There are a variety of mechanisms by which HMRC can and does collect tax from offshore entities and persons: - by way of withholding taxes; by imposing tax on UK persons connected with the offshore entities including settlements, controlled foreign companies (CFCs) and close companies; through the mechanism of exit charges when assets are transferred to non-uk ownership; and by imposing obligations on an overseas person s UK representatives to collect tax due, such as under the non-residents landlord scheme. Additionally HMRC and other governmental authorities have the facilities to track offshore entities with UK interests, including when a company ceases to be UK resident and in respect of offshore settlements. Most importantly there is a wealth of information relating to owners of UK land and property by way of the registers held by local authorities and the LRO. Finally HMRC can enter into reciprocal enforcement and mutual assistance arrangements with other countries to enforce payment of a capital gains tax and SLDT by offshore entities. 13 Section 165 TCGA 14 Section 159 TCGA 15 Section 271(3) TCGA 16 Section 271 (1A) TCGA 17 [Budget forecast June 2010] 18 including empty property relief, small business rates relief, rural rates relief and relief for charities and not for profit organisations for business rates; and council tax relief for those on low incomes, those with disabilities, age-related relief and full-time students 19 OBR budget forecast [2010] current receipts 20 The Land Registry Office for England and Wales; the Land Registry Office for Northern Ireland; and the ROS in Scotland

4 Making use of the land registry offices and the rating system Every local authority has records of all properties within its boundaries and basic information on the owners and occupiers. Additionally the land registries in England and Wales, Northern Ireland and Scotland should identify the majority of all properties. Cross checking the data between these two sets of organisations shouldn t be difficult. The land registries will presumably have information relating to UK properties being acquired by SPVs (onshore and offshore) but thereafter at present they may not, or may not be able to track any transfers of the SPVs. If UK tax was to be charged on any gains and on transfer on the sale of UK land and property, regardless of the residency of its owner and the vehicle of ownership, the major change under the land registration systems would be to require the true identity of the underlying beneficiaries of property (both the seller and the buyer) to be included in the land registry form at the time of registration and on any future transfers. Further required information would include the original price paid for a property, or its market value on acquisition, the value or consideration paid on disposal, and a calculation of any capital gains for the seller and SLDT for the purchaser. There could be a tick the box mechanism for capital gains exemption of any principal private residence. At present the applications at the LRO for England and Wales for first registration (Form FR1) and the application to change the register (Form AP1) require details of the applicant and the name for service for the proprietor, and if a company or LLP then their registered number, and for overseas companies, their territory of incorporation. On both these forms conveyancers are required to confirm the identity of their clients and where a conveyancer is not involved alternative confirmation of identity information must be supplied (presumably under standard money laundering procedures). Thus if properly done this requirement should provide the identity of the underlying beneficiary. A related set of questions could be required (if not currently required) under the rating systems whereby the underlying owner of the property in question would need to be identified and its UK agent. This information would be shared with the land registration offices and it would be a requirement under both systems for the agent and beneficiary to inform the authorities of any underlying change of ownership of the property. Under any new regime, on the land registration form there could be a requirement to include the date of acquisition of the property by the transferor and consideration paid at that time, as wells as a calculation of any capital gain arising on the transfer, and confirmation that the transferor would report the transaction and pay the CGT under selfassessment. Alternatively the procedure could require an undertaking by the transferor or its conveyancer on the LRO forms that CGT would be self-assessed and paid over, and until the CGT had been paid by the transferor it would stand as a charge on the property. Obviously this would be unacceptable to any buyer, and therefore it would become a standard term of any UK property transaction during the due diligence process that documentation relating to the inherent capital gains on the property would be produced and verified, the seller would indemnify the buyer for any unpaid CGT on the property which remained as a charge following completion, and an amount equal to the CGT would be held in escrow until the transferor confirmed payment to HMRC under selfassessment. Alternatively the transferor could pay the CGT on completion without waiting for the final payment date required under self-assessment, and earn interest on the early payment. This would cover directly held properties by non UK residents, but would not cover offshore transfers of SPV. Therefore it would be necessary for any unpaid CGT on a change in beneficial ownership (that is on the sale of the property owning SPV) to become the liability of the SPV as well as its owners. It would be a foolish buyer who acquired an offshore property owning vehicle on which UK CGT arose on the transaction and which remained outstanding and thereafter became a liability of the new owner.

5 For corporations and other property owning vehicles which are currently outside the UK taxation systems, and whereby their transfers on sale would not involve the LRO, requirements to self-assess for UK tax on transfers (both capital gains and SDLT) would be notified to their agents via the local authority rating systems for business rates and council tax and the UK agents would be responsible for notifying HMRC on any sale of the property owning vehicle. A new requirement would be introduced whereby the identity of the beneficial owner would be made to the system for business rates and council tax and an address for service. Conclusions The purpose of this article is to open a discussion on why non-resident UK property owners should not be subject to the same tax as UK residents. No new tax will be popular with the parties on which it would be imposed but that shouldn t prevent the underlying issues being properly considered including the potential amount of new tax which might be raised from CGT and SDLT applying to offshore property owners and entities. November 2011