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Rich pickings for HMRC? The new UK tax rules on “property-rich companies”

With effect from 6 April 2019, the scope of UK tax for non-residents has been extended to catch gains on disposals of interests in “property-rich companies”.

This note considers some of the details of the new legislation, and the implications for non-residents with shares or other interests in such companies.

The new rules, in context

The new rules on “property-rich companies”, discussed below, form part of a wider reform of the taxation of non-resident persons where UK real estate is concerned. 

For some years now, non-residents have been exposed to tax on gains realised on disposals of residential property in the UK. However, until now, gains accruing on the disposal of commercial property have been tax-free for non-UK resident investors. This disparity has been rectified by the Finance Act 2019, which has brought the rules on the taxation of residential and commercial property gains into broad alignment. 

For an overview of the property-related tax changes effected by the Finance Act 2019, see here.


The legislation does not itself refer to interests in “property-rich companies”. However, this term is convenient shorthand for companies whose value is substantially derived from UK land, whose shares are, if disposed of by a non-resident, capable of giving rise to a UK tax charge on any resultant gain.

The legislation is not, in fact, confined to disposals of shares.  In principle, disposals of other interests in property-rich companies, e.g. loan notes issued by such companies, can give rise to tax.  However, as explained below, disposals of receivables will, in practice, often not give rise to a chargeable gain.  

Calculating the liability

For the purposes of the non-resident tax charge on interests in property-rich companies, gains are (by default) calculated by treating the market value of such interests on 5 April 2019 as acquisition cost. 

In other words, shares and other interests in property-rich companies are (by default) rebased for these purposes as at 5 April 2019, and there can only be a UK tax charge on a non-resident if (and to the extent that) there is an increase in value after that date. 

However, this rebasing can be disapplied by election. It will be beneficial to elect out of the rebasing in the event that the actual acquisition cost of the shares or other interest in the company was greater than the 5 April 2019 market value, so that the calculation results in a loss, rather than a gain.

Where a disposal of an interest in a property-rich company does produce a gain, the applicable tax charge depends on the nature of the non-resident disponer. 

  • Non-resident companies will pay corporation tax at the applicable rate from time to time. This is currently 19%, but the rate is expected to decrease to 17% for 2020/21.
  • Non-resident individuals and trustees will pay CGT at 10% / 20%. Gains taxed under the property-rich companies rules are never subject to the higher CGT rates for residential property gains (18% / 28%) even where the company's assets are or derive their value from UK residential property.

Conditions for liability

For a disposal to be caught under the new rules, there are two conditions which must be satisfied: (1) the 75% UK land condition and (2) the 25% substantial interest condition.  

Subject to a targeted anti-avoidance rule (discussed below), and certain other existing anti-avoidance rules (e.g. the rule that applies to disposals by temporary non-residents) a disposal of an interest in a company by a non-resident cannot give rise to UK tax unless both of these conditions are met.

The 75% UK land condition

For an interest in a company to be capable of giving rise to a tax charge for a non-resident disponer, at least 75% of the company’s assets must be, or derive their value from, UK land.  Such derivation may be direct or indirect.

The 75% test is applied at the moment of the non-resident’s disposal of shares or other interests in the company. In contrast to the 25% substantial interest condition, discussed below, the position throughout the two years leading up to the disposal is generally irrelevant. 

An exception to this is if there is a change to the company’s assets (or what they derive their value from), made before the non-resident’s disposal of shares or other interests in the company, with the sole or main purpose of escaping tax under the new rules. Such a change will, it appears, be caught by the targeted anti-avoidance rule, discussed below.

Applying the 75% test is straightforward where the company directly holds UK land and/or assets that have no connection with UK land. The analysis may, however, be complex where the company holds interests in other companies which themselves hold UK land, or hold interests in yet other companies that hold such land. Within a multi-tiered corporate structure, there is a requirement to trace through all layers of the structure to determine whether, and to what extent, the company’s assets derive their value from UK land. 

The analysis may be complicated by the fact that for the purposes of the 75% UK land condition, a company’s assets are deemed not to be derived from UK land if they derive such value from or via a “normal commercial loan”. Such a loan is, very broadly, one which is not convertible to shares and under which the amount payable to the creditor is unrelated to any asset of the debtor, or the financial performance of the debtor.  Most loans, therefore, are “normal commercial loans” for these purposes, even if their terms are not commercial.

As is sadly the case with much recent tax legislation, some of the statutory drafting in relation to the 75% UK land condition is deeply obscure. The rules on this condition alternate between prescriptiveness and vagueness, and are likely to give rise to considerable uncertainty in practice.


There is an exemption for disposals where the underlying UK land is used for the purposes of a qualifying trade, which has been carried on for at least a year prior to the disposal, and will continue after the disposal. Where this is the case, the 75% UK land condition is deemed not to be met.

There is also a relief for the disposal of interests in multiple companies where such disposals are linked. Various conditions need to be met for the disposals to be linked, one of which is that the person making the disposals is connected with both/all companies whose shares are being disposed of. 

Where this relief is in point, the assets of those companies are aggregated for the purposes of the 75% UK land condition. Unless at least 75% of the aggregated assets are, or derive their value from, UK land, none of the individual companies can qualify as property-rich companies.

This relief may prevent a taxable gain arising on the disposal of what would otherwise have been an interest in a property-rich company, if that interest is disposed of together with interests in one or more companies that, viewed in isolation, would not be considered property-rich. The relief can only work in the taxpayer’s favour – if the aggregated assets of the companies in question meet the 75% test, it will still only be those companies whose assets meet the 75% test when viewed in isolation that will be treated as property-rich.

The 25% substantial interest condition

For tax to be chargeable on a gain realised on the disposal of an interest in a property-rich company, a 25% interest (or greater interest) in the company must be held at the time of the disposal, or such an interest must have been held at any time in the two years prior to the disposal.

A relief applies where a 25% interest has only been held for an “insignificant proportion” of the two year period (or an “insignificant proportion” of the period in which any interest has been held, if that is less than two years).  Remarkably, “insignificant proportion” is not defined in the legislation, but HMRC have published draft guidance indicating that it will generally consider 10% of the two year period (or 10% of the ownership period, if shorter) to be “insignificant”.

Various alternative tests apply to determine whether or not a person has an interest in a property-rich company and if so, what that interest is, as a percentage of the whole. One of these tests looks at the voting rights held; others look at economic interests, e.g. rights to participate in dividends and rights to capital on a liquidation. A person may have a 25% interest on one of these bases and not on others – for example, if the person has shares which confer voting rights but no economic participation.  But as the tests are alternative, there only needs to be a 25% interest on one of these bases for the 25% substantial interest condition to be met.

Non-equity interests, e.g. receivables, are generally disregarded in applying the economic interest tests. Certain preference shares are also disregarded. But receivables are taken into account where they are due under loans other than “normal commercial loans”. As discussed above, most loans are “normal commercial loans”, even where their terms are not commercial.

Where the 25% substantial interest condition is met, there can be a tax charge on the disposal of an interest in the company even if it is not that interest which causes the condition to be satisfied.  For example, if a non-resident shareholder with 25% or more of the voting rights in a property-rich company receives repayment of a receivable due from the company, or assigns the receivable, the disposal of the receivable could give rise to tax.  However, existing CGT rules may mean that there is no chargeable gain on the disposal.  

Aggregating factors

Importantly, where connected persons have interests in a property-rich company, the various tests for a 25% interest are applied by reference to their interests on an aggregated basis. 

A disposal of shares in a property-rich company by a non-resident can therefore give rise to tax even if the disponor individually has a less than 25% interest in the company. This is so if there are connected persons who also have interests in the company, and collectively they have a 25% or greater interest (or have had such an interest at any time in the two year period leading up to the disposal).

However, for these purposes the class of connected persons that can be taken into account is more limited than is often the case. Certain relationships which in other contexts result in individuals being connected with each other do not result in connectedness here. In particular, siblings are unconnected, although an individual is treated as connected with any spouse or civil partner, and with all direct ancestors and descendants.

This means that, for example, five siblings with equal shares in a property-rich company would not meet the 25% substantial interest condition. On the other hand, five siblings and their parents with equal shares in a property-rich company would meet the condition.

In some scenarios it will be necessary to consider the interaction between the aggregation rule and the relief which applies where a 25% or greater interest has been held for an “insignificant proportion” of the two year period, or any lesser period in which interests in the property-rich company have been held. In such cases it will, it appears, be necessary to look at the aggregated interest of the disponer and connected persons over the two year period, or lesser holding period, and see whether, if the 25% test was met in that period, the period in which it was met represented 10% or less of the relevant period.

Beware of the TAAR

As now seems to be standard practice with modern tax legislation, a very widely drafted targeted anti-avoidance rule (TAAR) has been incorporated into the legislation on property-rich companies, evidently with the intention of sealing any gaps in the legislation that HMRC think might have been overlooked. 

The broad wording of this TAAR is likely to make it difficult, in many cases, to say definitively whether the rule is engaged. On its terms, the TAAR applies to any arrangements entered into by the taxpayer where the main purpose, or one of the main purposes, of such arrangements was to secure a tax advantage as a result of:

  1. any of the new provisions regarding property-rich companies applying or, conversely, not applying, or
  2. any double taxation treaty (DTT) provisions having effect where the resultant tax advantage is contrary to the “object and purpose” of the DTT. 

As is customary with TAARs which refer to tax advantages, the term “tax advantage” is extremely widely defined.  It includes, inter alia, the avoidance of a charge to or assessment to tax.

In any case where arrangements are found to have had a purpose that is caught by the TAAR, “just and reasonable” adjustments are required to be made, to counteract any tax advantage so secured.

The first limb

The first limb of the TAAR seems, at first sight, to have the potential to catch planning that simply relies (it might be argued, quite reasonably), on the “safe harbours” built into the legislation.

For example, it might appear that if the non-resident shareholders in a company procure that as well as acquiring UK real estate, the company also acquires other assets,  which are not UK land and do not derive their value from UK land, and one of the purposes of such other assets being held is to prevent the company from being property-rich (i.e. to ensure that the 75% UK land condition isn’t met), there is scope for counteraction, potentially resulting in tax being charged on a share sale as if the company were, in fact, property-rich. 

However, depending on the facts of the case, there may be scope to take the position that the TAAR does not apply to arrangements of the kind outlined above, on the basis that the purpose of securing a tax advantage is not a main purpose of the arrangements. Clearly, this view can only be taken where there are, in fact, other purposes (e.g. asset diversification), and the purpose of causing the 75% UK land condition not to be met can reasonably be regarded as subsidiary to those other purposes.

Another possible line of argument is that, despite the apparent breadth of the definition of “tax advantage”, it has to be construed in light of existing case law on the meaning of “tax avoidance”, in particular IRC v Willoughby. There is an argument that where arrangements are intended to ensure that a tax charge under the property-rich companies rules does not arise, that is only avoidance of a tax charge if such result is contrary to the will of Parliament. The legislative intent appears to be that there should not be a tax charge under the rules where arrangements are put in place that at all relevant times fall within the “safe harbours” of the 75% UK land condition or the 25% substantial interest condition. On this view, arrangements can be designed with these conditions in mind, and even if not satisfying one of these conditions is a main purpose of the arrangements, the TAAR should not apply.

Assuming that this is right, a last-minute change to the assets which a company holds, prior to a disposal of its shares, with the sole or main object of causing the 75% UK land condition not to be met, will be caught by the TAAR. But if the 75% UK land condition would not have been met at any time in the period in which the non-resident person has held shares in the company, it is suggested that the TAAR should not apply, even if the company’s holding of non-land-related assets was influenced by the 75% test.

The second limb

Turning to the second limb of the TAAR, there is also uncertainty about when a tax advantage produced by the application of a DTT will be considered to be contrary to the “object and purpose” of the DTT.

However, the wording of the second limb has some similarity to the so-called principal purpose test in the OECD Multi-Lateral Instrument on Base Erosion and Profit-Shifting (or “MLI”).  It seems likely that HMRC will treat OECD guidance on the MLI principal purpose test as being relevant here. That guidance distinguishes between tax advantages obtained under DTTs where there is a commercial / non-tax reason for arrangements that give rise to DTT relief (even if the availability of such relief was taken into account when those arrangements were devised), and tax advantages under DTTs where there is no such rationale, and the availability of DTT relief was the only motivation.

It is likely, therefore, that HMRC will invoke the second limb of the TAAR where a decision has been taken to create a holding company in a country with which the UK has a “useful” DTT (i.e. one that prevents UK tax being charged on gains realised by a resident of the other contracting state), if that was done with the sole aim of allowing the holding company to make a tax-free disposal of shares in a property-rich company. However, if there are additional, commercial / non-tax reasons for the incorporation of the company in the relevant country, the DTT relief may be unaffected by the TAAR.

Compliance issues

Disposals by non-residents of interests in property-rich companies are subject to the same tax compliance regime as disposals by non-residents of directly held UK real estate. This means that where the disponer is an individual or trust, there is generally a requirement to report the disposal to HMRC and pay any CGT that is due within 30 days of the disposal. This reporting requirement applies even where the disposal has resulted in a loss.

Where the disponer is a company, and therefore within the scope of corporation tax on any UK real estate gain, a different regime applies. It appears that a somewhat longer period will be allowed by HMRC for submission of a corporation tax return and payment of the tax. 

It seems likely that in a significant proportion of cases these obligations will, understandably, be overlooked. The fact that there can be a UK tax charge for a non-UK resident person, on the disposal of a non-UK situs asset, which may derive its value from UK real estate only very indirectly via other companies or entities, and the fact that such non-UK assets may be sold or otherwise transferred without UK lawyers or other UK-based professionals being involved, is likely to result in a significant amount of involuntary non-compliance, which may never be picked up and rectified. 

The pickings for HMRC from the property-rich company rules may, therefore, not be quite as rich as HMRC suppose….

This article was written by Dominic Lawrance and Catrin Harrison. For more information, please contact Dominic Lawrance on dominic.lawrance@crsblaw.com or +44 (0)20 7427 6749.

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