Losing the offshore advantage
by Zoe Thomas, partner and head of real estate tax at Smith & Williamson
In recent years, the tax landscape for property investors has changed dramatically, perhaps no more so than when it comes to non-resident capital gains tax (NRCGT).
Indeed, most tax benefits that derived from having non-resident status have now been eliminated and with the new surcharge for SDLT of 2 per cent from 1st April this year, it may well tip the balance so that it’s more beneficial to be onshore.
Prior to 2015, non-residents that sold UK property attracted virtually no CGT, so it was very attractive to set up funds offshore.
But from April 2015, non-residents were required to pay NRCGT on direct disposal of UK residential property. Then, on 6th April 2019, all types of UK property and land became subject to NRCGT and the scope of the tax was extended from direct to indirect disposals, creating a far-reaching net where property investors are concerned.
The second move meant that when a non-resident sold shares in a property-rich company (where 75 per cent of the gross assets are made up of UK property and land) that they had at least a 25 per cent stake in, the deal was subject to NRCGT. As a result, investors who did not necessarily have a direct stake in UK property fell under the regime.
A lot of the advantages of holding property in offshore vehicles in jurisdictions such as Jersey, Guernsey or Luxembourg have diminished. From a tax perspective there is little to be gained and funds are increasingly setting up shop domestically.
However, this does not mean HMRC has gained a valuable new income stream. As the legislation was new – and the government feared being accused of taxing retrospectively – funds were allowed to revalue their properties right up until 6th April last year. As a result, the only gain that can be subject to NRCGT is any increase in a property’s value after that date – and, of course, only when a property is sold.
Moreover, the window of time where there was likely to have been an uplift was vanishingly small. Less than a year after the NRCGT changes came into force, Covid-19 was upon us – and few properties have increased in value since.
Of course, the situation could change quickly, but for now, tightening the capital gains regime has done little to swell HMRC’s coffers.
