The Government’s changes to the tax treatment of overseas investment in UK commercial property will increase revenues in the short term but might prove short-sighted, write Craig Hughes and Russell Dickie
There is, as they say, no place like home. However, in recent years, solid and steady capital growth and reliable rental yields, as well as favourable exchange rates and regulation have made the UK commercial property market a lucrative option for overseas investors. Their entitlement to generous tax breaks is unlikely to have dampened enthusiasm, either.
The most attractive tax incentive for overseas investors has undoubtedly been a complete exemption from UK Capital Gains Tax (CGT) on profits generated from the sale of a UK commercial property. With property holders in most major international property markets subject to local taxes at the rate of 10 – 34 per cent on commercial property gains, overseas investors in the UK stand to gain a significantly higher return on their investments.
This golden age came to an end following the 2017 Autumn Budget, when Phillip Hammond announced that, for sales realised after 6 April 2019, non-resident investors would pay the same rate of CGT (currently 20 per cent) as their UK counterparts. At the time of the announcement, the Government’s stated objective was to ‘level the playing field’ between UK resident and non-resident investors.
However, without careful implementation, this move could backfire, and it is essential that steps are taken to avoid discouraging overseas investment or drive down property prices.
The Chancellor’s announcement came amidst a backdrop of several tax policy changes and proposals introduced in the past five years, which have worsened the UK tax position for overseas investors. These include the introduction of CGT for non-residents selling residential property after 6 April 2015, an annual tax charge for non-residential companies owning UK residential property (ATED) and the introduction of inheritance tax for non-residents owning UK residential property via an offshore company or trust structure.
While until now, these changes have only affected the UK residential property market, it was only a matter of time before the Government extended the CGT rules to commercial property holders. Nevertheless, it would be naive to overlook the measure’s potential consequences, particularly given the current climate of Brexit uncertainty and the rise of nationalism within the political conversation.
There is a risk that the removal of these generous tax breaks will discourage overseas investment and potentially harm the UK commercial market in the coming years. Turning instead to changes which seek to promote investment in the UK and increasing tax revenues through other means will lead to wider, far-reaching benefits for the economy as a whole.
A study by Countrywide in 2017 suggested that the number of foreign investors in UK properties had halved since 2010. While it is difficult to attribute this decline to the changes in tax policy alone, many industry commentators have suggested that increased tax and administrative burdens have deterred foreign investment in the residential market.
It is likely that this decline would have been even more severe had sterling not been so weak. Taking the UK residential market as an example, it is not inconceivable that the same trend could repeat itself following these changes to the taxation that applies to commercial property.
It is worth comparing the UK’s approach to overseas investment with countries such as Spain, Belgium, Portugal, and Switzerland, which provide residency and visa incentives for overseas property investors. If the enduring message, in the Brexit landscape, is that foreign investment in the UK is not welcome, foreign commercial property ownership in the UK will inevitably decrease, as investors opt instead for countries offering them incentives, rather than deterrents.
Seeking expert guidance from experienced UK tax advisors now can help overseas investors to keep up to date with their new-found obligations to pay tax to HMRC, and avoid experiencing any potential headaches further down the line.
While in the short-term, Government’s changes to the tax treatment of overseas investment in UK commercial property will certainly increase their revenues, the decision may well prove short-sighted, particularly given the ongoing climate of Brexit uncertainty.
By emulating other European countries which offer incentives to overseas investors, the UK will likely gain greater financial benefits in the years to come, within the property market and the entire economy.
Craig Hughes is a partner and Russell Dickie is a senior manager in the private client team at accountancy firm, Menzies LLP