Currently most non-resident landlords are able to sell a UK owned commercial property without being charged on the gain. From April 2019, legislation comes in which will result in any capital gain arising from an asset sale being taxed but limited to property values being rebased from April 2019. Here we explore who this measure will affect and how Capital Allowances can offset this increased tax liability.
This rule change will apply to most, however, there will be some exemptions available for those who would not be chargeable to corporation tax if they were a UK resident, which will include some pension funds. The details are still to be confirmed, but it is likely that some form of election mechanism to provide exemption will be available. Investors would realise a gain on the sale of their interest in the fund, but if exempt then they too can claim an exemption.
Not all property is transacted as an asset sale and the sale of UK property as part of a company disposal, the gain currently in most cases is not taxed for non-resident investors. Under the draft legislation, gains arising from the disposal of shares which invest in UK property will also be subject to UK tax from April 2019.
To mitigate this increased tax liability non-exempt non-resident investors could consider tax-exempt vehicles such as a PAIF or a REIT although there is a cost to convert as well as compliance and ongoing reporting requirements.
Alternatively, Capital Allowances can be used to help offset this increased tax liability.
Capital Allowances have not been of great importance to date for many non-residents due to the way they are structured and the fact that many do not become liable for tax for a number of years. However, this change, and the additional tax burden that it creates, is very likely to alter the perception and need for Capital Allowances relief.
Those investors whose properties have increased in value, typically due to a combination of time, market conditions, active management and physical improvement with refurbishments and extensions will need the Capital Allowances going forward to offset against their future gain.
There is a common misconception that claiming Capital Allowances will affect the capital gains tax position on sale. Unless the property is sold at a loss one can claim Capital Allowances without affecting the base cost under s41(1) Taxation of Chargeable Gains Act 1992 (TCGA 1992).
It is not mandatory to claim Capital Allowances relief, unless you are a REIT or PAIF, so it could still be argued that if there is no taxable income to offset then why should one consider Capital Allowances now, and not in the future when tax liabilities arise.
The benefit in claiming as early as possible is that Capital Allowances can be disclaimed and rolled forward meaning that when an entity becomes liable to tax in the future it will have a greater pool of allowances to be able to be used immediately, meaning that a greater portion of the tax liability can be reduced, or indeed wiped out.
Failure to prepare for future tax liabilities, or in other words failure to claim now, will essentially mean companies could be worse off. In all instances though advice should be sought from your accountants or tax adviser as to the potential future tax liabilities and from your specialist Capital Allowances advisor on how to maximise the Capital Allowances relief.