Guest article by Paul Hotchkiss of Hotchkiss Associates Limited
The Budget measures have extended the UK Government’s tax base by taxing otherwise non-taxable income and inclusion of most Island-held UK property interests within the scope of UK tax. This will have a wide impact on the Island’s fiduciary sector.
Property: a shift to corporation tax
From 6 April 2020 non-UK resident companies which carry on a UK property business or have other UK property income will be charged to corporation tax (CT) (rather than income tax under the non-resident landlord scheme (NRLS) as currently). Furthermore, chargeable gains on the disposal of UK residential property will be charged to CT, instead of CGT (NRCGT) as at present. Draft legislation will be published for consultation in summer 2018.
Extending the scope of UK tax to UK property interests
Although subject to a consultation, the wheels seem set in motion. It is proposed that all disposals of immovable property by non-residents (except pension schemes), both directly and indirectly, will be brought within the scope of CT. For companies from 1 April 2019 and for those within the charge to Non-Resident Capital Gains Tax from 6 April 2019. Note: ATED-related CGT may disappear due to its complexity. This means:
- all direct disposals of UK commercial property by non-residents;
- Widely-held companies owning residential property (eg funds)
- any person making an indirect disposal of such property.
will be brought into charge. Indirect disposals will arise where a non-resident disposes of an interest (shares, options etc) in a property rich entity. This is one where the envelope (ie company) derives 75% or more of its gross asset value from UK immovable property (ignoring debt) where, at the date of disposal, or at any point in the 5-years prior to that date, the non-resident holds, or has held, a 25% or greater interest in the envelope. The 25% test will take into account ownership before April 2019 to determine if the 25% test is met within the 5-year period prior to the disposal where relevant.
Note: Future gains brought within charge will be referenced to market value as at budget day: valuations will become important.
How is this likely to affect the Isle of Man?
Non-UK residents are so used to the freedom of not being within the scope of UK tax and many are heavily invested in UK property interests. It is clear that income will be taxed to CT but bringing capital gains on new property interests within charge is subject to consultation. The main question being how will such measures affect UK property prices and investment? Assuming the change happens:
- All property invested IOM residents will need to analyse their tax position much more closely.
- Funds and non-closely held companies will be brought within the charge to tax (but not pension schemes).
- Tax will need to be considered whenever reorganising holdings.
- More record keeping will be needed.
- The distinction between trading and investment will still be important because of the recent land trading rules.
- CT returns will be required: the legislation is much more complex (eg loan interest deduction will be under the loan relationship rules) and reporting is not as simple.
- Increased scrutiny of returns may result (both past and future) especially loan interest deductibility.
- No suggestion so far that the IHT protection for non-UK domiciled individuals holding UK commercial property through companies will be affected.
- The reasons for using IOM companies to hold any UK property interests are diminishing. Lower administrative costs may result in a migration of entities to the UK.
Enquiries: HMRC’s enquiry period into offshore activities extended to 12 years. This means in theory records may need to be retained for longer. This may result in data protection issues for entities with UK interests.
Trusts: The general taxation of trusts is to be reviewed and simplified. Some budget measured tightened up indirect payments to non-residents which are destined to UK residents.
Royalties: Tax on royalties paid overseas to be extended to counter the low levels of tax paid by multinationals in the UK. Some island–based IP companies will need to review their tax position. Generally, look forward to paying more for your Starbucks and Apple products!