Expert Insights

Non-resident CGT changes re UK real estate: the beginning of the end, or the end of the beginning?

Yet further changes to the taxation of UK real estate have been made, with effect from 6 April 2019.  The scope of UK tax for non-residents has been extended to catch gains realised on direct disposals of UK commercial properties, and gains on disposals of interests in “property-rich companies”.

This note focuses on the impact of these changes on non-UK resident individuals and trustees with interests in UK real estate, whether held directly or via companies.  For discussion of the impact of the changes on corporate/institutional investors please click here.

A time of change

UK land held by non-residents has been a particular target of tax changes in recent years.  In 2012, a punitive 15% stamp duty land tax (SDLT) rate was introduced for most corporate purchases of UK residential property.  This was followed by the introduction of ATED, an annual tax on UK dwellings held by companies, in 2013.  Subsequent legislative changes brought in ATED-related CGT and then non-resident CGT (NRCGT), both of which subjected non-UK residents to tax on gains realised on direct disposals of UK residential property.

A further major change in relation to UK residential property occurred in April 2017.  Until then, there was a significant inheritance tax (IHT) advantage for a foreign domiciled individual, or a trust created by such an individual, in holding UK residential property via a non-UK company, as this eliminated IHT exposure.  In many cases, this IHT advantage was felt to outweigh the disadvantage of the company being within the ATED regime.  However, this IHT protection was stripped away by changes to the legislation in April 2017.

The result of all this is that, for some while now, non-residents have been exposed to an array of taxes where UK residential property is concerned, and generally there is little scope to use “structuring” to mitigate this tax exposure.  Indeed, “structuring” has the potential to make the tax position worse.

However, up to now, these changes have not affected non-resident owners of UK commercial property.

What’s new?

The latest changes, introduced by the Finance Act 2019, represent the next steps towards parity in the tax treatment of UK residents and non-UK residents holding UK real estate, and bring the rules on the taxation of residential and commercial property gains into broad alignment.

Residential property disposals

One piece of good news is that ATED-related CGT has been abolished.  Property gains realised by non-resident companies have been moved out of the CGT regime, and into the corporation tax regime.  At the same time, the Government has taken the opportunity to simplify the “rebasing” rules, which determine what proportion of the economic gain is subject to tax when a non-resident person disposes of UK real estate.

The cumulative effect of these changes is something of a windfall for non-resident companies disposing of UK residential property:

  • Under the former ATED-related CGT regime, such companies were typically liable to tax on the increase in the value of the property since April 2013.  However, under the new regime, any increase in value between April 2013 and April 2015 is generally exempt from tax.

  • Under the ATED-related CGT regime, tax on residential property gains was payable at 28%, and up to now, non-resident companies disposing  of commercially let residential property have generally been subject to NRCGT at 20%. Gains realised by such companies are now subject to corporation tax, currently charged at 19% and expected to fall to 17% in 2020/21.

Non-resident individuals and trustees disposing of UK residential property are still subject to NRCGT, at the higher rates applicable to residential property gains (18% / 28%).

Commercial property disposals

Non-resident investors in commercial real estate in the UK have been largely unaffected by the tax changes to date.  However, the April 2019 changes have brought the treatment of UK residential property and commercial property into alignment, at least where capital gains are concerned.

Non-residents making direct disposals of UK commercial property are now chargeable to tax on any resultant gains, although the property will, by default, be rebased to its market value on 5 April 2019 when calculating the gain.

Non-resident individuals and trustees are subject to CGT at the normal rates (10% / 20%), whereas non-resident companies are again within the scope of corporation tax (currently 19%).

Disposals of interests in “property-rich companies”

Perhaps the most striking change made by the Finance Act 2019 is that there is now scope for a tax charge on a disposal by a non-resident of an indirect interest in UK land, whether that land is residential or commercial.

This new tax charge essentially applies to disposals of shares in companies that either themselves own UK land, or own interests in other companies that own UK land, whether directly or indirectly.  The tax charge, where applicable, is on the increase in the value of the shares that have been disposed of, rather than the increase in the value of the underlying land.

Again, there is rebasing as at 5 April 2019.  In other words, tax will (by default) only be charged if, and insofar as, the proceeds of disposal of the shares exceed the market value of the shares on 5 April 2019.  Where shares are disposed of by way of gift, or at an undervalue, the market value of the shares will be treated as proceeds of the disposal, in accordance with normal CGT principles.

Non-resident companies disposing of shares that are caught by these new rules will be subject to corporation tax on any resultant gain (currently at 19%).  Non-resident individuals and trustees will pay NRCGT.  This will be charged at normal rates (i.e. 10% / 20%), rather than the elevated rates applicable to residential property disposals.  This is so even where the underlying UK property is residential.

Rates and dates

The tax rates and rebasing dates can be summarised as follows. 

Rebasing can in all cases be disapplied by election, where it is preferable for the actual base cost to be used in computing the chargeable gain, instead of the market value of the asset on the rebasing date.

Type of non-resident:

Applicable tax:

Direct disposal of residential property:

Direct disposal of commercial property:

Indirect disposal (of shares in a “property-rich company”):


Corporation tax

Tax at 19% on gain since 6 April 2015

Tax at 19% on gain since 6 April 2019

Tax at 19% on gain since April 6 2019



Tax at 28% on gain since 6 April 2015

Tax at 20% on gain since 6 April 2019

Tax at 20% on gain since April 6 2019



Tax at 18% / 28% on gain since 6 April 2015

Tax at 10% / 20% on gain since 6 April 2019

Tax at 10% / 20% on gain since 6 April 2019

“Property-rich companies”

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.

For a disposal to be caught under the new rules, there are two conditions which must be satisfied.  In essence:

(1)  At least 75% of the company’s assets must be, or derive their value from, UK real estate.  Such derivation may be very indirect, via any number of other companies or entities; and

(2)  An interest in the company of at least 25% must be held at the time of the disposal, or must have been held at any time in the two years prior to the disposal.  For this purpose, the interests of any other persons who are connected with the disponer can be attributed to the disponer, and the 25% interest test is applied to their interests on an aggregated basis.

Subject to a targeted anti-avoidance rule which is built into the legislation on property-rich companies, and certain existing anti-avoidance rules that are discussed below, a disposal of an interest in a company by a non-resident will not give rise to UK tax unless both of these conditions are met.

For a detailed discussion of the above conditions, and other aspects of the rules on property-rich companies, please click here.

De-enveloping difficulties

The new rules taxing non-residents on disposals of interests in property-rich companies represent a major enlargement of the territorial scope of UK tax.  This change is likely to be most commonly encountered (a) on sales of companies that hold “enveloped” UK real estate, and (b) in “de-enveloping” scenarios, ie exercises to extract UK real estate from a company into direct ownership.

Under the new regime, there may be two layers of UK tax on a de-enveloping, charged by reference to the same economic gain – a corporation tax charge at company level on the disposal of the UK property, and a NRCGT charge at shareholder level on the disposal of shares in a property-rich company.  A disposal of the shares at a time when the company is property-rich may be avoidable by means of an in-specie dividend of the property, before the company is put into liquidation; but for various reasons this will not always be practical.

Where UK land is held within a multi-tiered corporate structure that is being wound up, there may in fact be a risk of UK tax being charged many times over on the same economic gain, although this unfortunate outcome should be avoidable through careful structuring.

Shareholder loans now need very careful consideration.  In the context of a de-enveloping, such loans should not be waived prior to liquidation of the company, as doing so will increase the value of the shares, without increasing the shareholder’s base cost in them – unnecessarily inflating the chargeable gain realised by the shareholder on the disposal of the shares.  Capitalisation of loans (ie conversion of them into new shares) may be the solution, but this may entail SDLT risks.  This is now, more than ever, a highly technical area in which expert advice should be sought.

Compliance headaches

The reporting regime for individuals and trustees who have made a disposal falling within the NRCGT rules typically requires a tax return to be filed within 30 days of the disposal, even where no gain has been realised.  There are very limited exceptions, e.g. for “no gain / no loss” transfers between spouses.

Non-resident companies holding UK land are now within the corporation tax reporting regime and will need to register with HMRC accordingly.  The corporation tax regime was not designed with non-resident companies in mind and this extension of the regime is likely to result in unexpected compliance burdens for such companies.  For further discussion click here.

Interaction with existing anti-avoidance rules

Fortunately, the interaction between the rules on the taxation of non-residents on property gains, and property-rich company gains, with the existing CGT anti-avoidance rules is relatively straightforward. 

The basic principle is that a gain that is subject to tax on the non-resident person making the disposal (whether that is a gain on a disposal of UK land, or a gain on the disposal of an interest in a property-rich company) is outside the scope of such anti-avoidance rules.  So for example:

  • A gain realised by a non-resident individual on which CGT is charged is outside the scope of the temporary non-residence rule for CGT.  This is the rule under which a gain realised by a non-resident individual who has previously been UK resident, and who later resumes UK residence, can be treated as accruing in the tax year of return to the UK, if (broadly) the non-resident period is five tax years or fewer.

  • A gain realised by a non-resident trust on which CGT is charged is outside the scope of the rules under which gains of such a trust can be taxed on the trust’s UK resident settlor, or on UK resident beneficiaries who receive capital distributions or benefits from such a trust.

The exclusion of immediately taxable gains realised by non-residents from the scope of these anti-avoidance rules is obviously designed to eliminate the possibility of the same gain being subject to CGT twice over.

Gains realised on the disposal of UK land, or on the disposal of interests in property-holding companies, are however caught by these anti-avoidance rules if (and to the extent that) they do not give rise to an immediate tax charge for the non-resident disponer. 

For example, this applies to any part of the economic gain on a land disposal which is non-taxable on the non-resident disponer by virtue of rebasing.  It also applies to a gain accruing on the disposal of an interest in a property-rich company, where such gain is non-taxable on the non-resident disponer on the basis that his interest, combined with the interests of any connected persons, is less than 25%.

More is yet to come – but how much?

The Government’s campaign of reform to the rules on the taxation of UK land is ongoing and it shows no signs of slowing down.

Rental income

With effect from April 2020, UK rental income of non-UK companies will become subject to corporation tax, rather than income tax (as at present). Somewhat perversely, this will actually reduce the tax take for the Exchequer, since corporation tax is due to be reduced to 17% from April 2020, while non-resident companies currently pay income tax at the basic rate of 20%.


There is also a consultation underway in relation to the introduction of a further SDLT surcharge of 1% for non-resident purchasers of UK land.  It seems unlikely that the consultation will result in anything other than the introduction of the proposed surcharge, producing a maximum possible SDLT rate of 16%.  For further discussion click here.

What else?

However, the Government could go yet further.  For foreign domiciliaries, there is still a significant difference between the tax treatment of residential and commercial property, where such property is indirectly held.  Foreign domiciliaries can still protect the value of UK situated commercial real estate from IHT, through the use of a holding company with non-UK situated shares; whereas this has not been possible for residential real estate since April 2017. 

This disparity might be regarded as anomalous.  As the aim of the game seems to be alignment of the tax rules on residential and commercial property, and alignment of the treatment of resident and non-resident persons where UK land is concerned, it would not be very surprising if the April 2017 IHT changes were extended to encompass commercial, as well as residential, land.

Another obvious gap that the Government might try to plug is the lack of any UK duty on transfers of shares in property
holding companies incorporated outside the UK, where such transfers are effected outside the UK. At present, there is scope to achieve a substantial tax saving by transferring such shares, instead of transferring the underlying UK real estate.  It would, perhaps, be unsurprising if the Government sought to impose SDLT, or some other form of duty, on such indirect transfers of UK land, perhaps using a property-rich company test that could piggyback on the new rules mentioned above.

It would, in any event, be naïve to assume that where reform of the tax rules on UK real estate are concerned, the Finance Act 2019 changes are the end of the road.  It’s possible that the Government is, in fact, just getting into its stride.

This briefing note was written by Dominic Lawrance and Catrin Harrison. For more information please contact Dominic on +44 (0)20 7427 6749 / or Catrin  on +44 (0)20 7427 6514 /


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