UK Property Assets: Tax Update

It has not been a happy few years for those of us owning UK property. Not only have capital returns stagnated, but there are a number of new property related tax charges to be aware of, which will probably detract further from any income or capital gains.

These charges affect both direct property owners and those holding property funds and instruments such as REITS.

First, tax relief on mortgage interest on directly held UK property will be phased out by April 2020.

In addition to that, ‘private residence relief’ – an exemption applied to capital gains on second properties – will be reduced. The current exemption allows relief on any capital growth in the final 18 months of ownership. From April next year this is being cut to 9 months.

There is more bad news. The ‘lettings relief’, where certain capital gains are exempt if the property is rented out, is being reduced from its current threshold of £40,000.

Some estimates expect the average property seller to have to pay an extra £20,000 in Capital Gains Tax (CGT) due to this reduction in benefit.

Furthermore, there have been attacks on the capital gains opportunity for non-residents, which come hard on the heels of changes to the tax treatment for UK residents holding investment property.

The new legislation comes under the obscure title of Finance Act 2019 Schedule 2 Part 1 Para 12 (Schedule 5AAA TCGA92). The legislation effectively brings all disposals of UK property by non-UK residents within scope for capital gains tax – the so-called Non-resident Capital Gains Tax (NRCGT).

This affects investments in UK property not limited to direct property investment but also indirect investment through vehicles such as collective investment vehicles that are considered to be UK property ‘rich’.

The definition of Property heavy or ‘rich’ is those structures having more than 75% of their gross asset value invested in UK property.

Any collective structure falling into this category is liable for NRCGT at 19% on the gain (or 17% after April 2020).

One ray of sun in this sky of clouds shines on assets held in REITs and owned through a tax-efficient life insurance wrapper in the Isle of Man or Ireland, there is an exemption on the CGT due to Double Tax Treaties between the UK and these states (and any other state who has such an agreement in a DTT).

It is not a surprise that many property analysts are predicting the above measures will further depress capital values in the UK, and are recommending to sell and make use of these benefits before they disappear resulting in a stampede to the exits next year. You have been notified!