Jurisdictions across the globe have either introduced new or strengthened existing rules controlling foreign investment: the UK is no exception and the trend for even greater transparency in UK property has continued, especially where overseas investors are involved, driven by the UK Government’s wider push to tackle corruption. Here we look at a few key changes which overseas investors in UK property need to be aware of; the likely impact of those changes and the reaction from overseas investors so far.
Register- Overseas Entities
Two years after this was first announced by the then Prime Minister, David Cameron, The Registration of Overseas Entities Bill was finally published in July and the consultation on the draft legislation closed in September. From 2021, there will be a new register of the beneficial owners of overseas entities that own or wish to buy or let UK property. Such overseas entities will be required to be registered with the details of their “registrable beneficial owners”, determined on the same basis as under the Persons of Significant Control regime introduced in 2016. Overseas entities will be unable to register the purchase, sale, charge or grant of certain Leases of UK property at the Land Registry unless and until they appear on the new register. The potentially serious implications of failure to comply with the new requirements (including criminal liability and the inability to register title to UK property) will mean that additional due diligence checks and warranties will be needed to ensure that an overseas entity has an up-to-date registration number and that the one-year update period has not expired (or will not be expiring before completion of the transaction).
What can overseas entities do now to prepare for the new regime? Those overseas investors who either already own UK property or wish to buy/lease UK property should review their corporate structures to identify who their “registrable beneficial owners” are and continue to monitor these proposals to ensure prompt registration when necessary. While the new rules have yet to be finalised and various uncertainties remain not least as to exactly which entities will be exempt, how to raise awareness of the rules coming into force (to avoid criminal liability simply by doing nothing) and how JPUTs and foreign government pension and superannuation funds will be affected. One thing is certain: the new rules will add another layer of complexity to property transactions involving overseas investors.
Additional tax burdens on non-resident investors
In addition to the new overseas entities register, a few tax changes have either been announced over the past 18 months or are in the pipeline, which will also affect overseas investors. Examples include Capital Gains Tax on disposals by non-resident investors in UK property, Corporation Tax (rather than Income Tax) on non-UK resident companies that carry on a UK property business and, most recently, a proposed additional 1% SDLT surcharge on foreign buyers of UK residential property.
Regulation and tax
What has been the impact of these additional regulatory and tax changes so far? Is it just “business as usual” …? If initial signs are anything to go by, the appetite of overseas investors to investing in UK property has certainly not been dented: 2018 saw record levels of overseas investment into London with Asian investors accounting for the largest share with £3.6bn in bought property, and South Korean investment in particular showing a significant increase on its 2017 levels. In addition, there are expectations for a new wave of Japanese investment into the UK, although no-one expects this to happen instantaneously. The picture is not quite so rosy for outbound investment from mainland China, which has fallen markedly over the past year, but this is due more to the introduction by the Chinese Government in 2017 of tighter controls on foreign property acquisitions than as a result of these proposed changes.
There are clearly challenges ahead in terms of overseas investors getting up to speed with the new regulations and making sure that registrations are completed and kept up to date. The changes being introduced by the Overseas Entities Register are unlikely to act as a significant deterrent to investment in UK property. More important are the increased tax burdens facing overseas investors but, as we said at the start, the UK is to a large extent merely playing catch up with other jurisdictions where similar rules are already in place.
Brexit – Asian investors remain significant investors into the UK notwithstanding the current uncertainty. Although recently there has been some shift in the sources of capital and a dip in overall UK investment volumes in the third quarter of the year, the perceived advantages of investing into the UK (and particularly London), including favourable exchange rates, have largely outweighed concerns related to the UK’s withdrawal from the EU.
The fundamentals for investing into the UK remain strong and far from pulling up the drawbridges, UK property remains open for investment from all parts of the globe.
Tax – Update
The UK tax questions that matter most to the property sector: How will we be taxed on our income and capital gains, how much SDLT will we need to pay and what capital allowances are available are invariably near the top of the list? At least for some investors, the answers to all of these will be changing over the next couple of years. Add to this a new 2% digital services tax that will apply regardless of physical presence and there is plenty to think about following the 2018 Budget.
Capital gains tax- Non-resident
In many other jurisdictions, overseas investors have not, until now, had to pay UK tax on UK property gains (other than on certain direct disposals of residential property). However, this is set to change from April 2019, when non-UK residents disposing of UK property (whether commercial or residential) will be liable to UK Capital Gains Tax. Indirect disposals of UK land held through “land rich” holding vehicles (such as a Company, Partnership or Trust) are also caught. Looking further ahead to April 2020, non-UK resident companies that carry on a UK property business or have other UK property income will be charged corporation tax on that income, rather than income tax as at present. Together these changes will put UK and overseas investors in UK property in very similar UK tax positions from 2020.
The Government started laying the groundwork for non-resident capital gains in 2013, with the introduction of ATED-related CGT. But this doesn’t make the expanded scope any less of a fundamental change to the taxation of commercial property in the UK. Rebasing to April 2019 will be available where the asset was not previously within the UK tax net and the Finance Bill provisions contain a few complex elections and exemptions designed to lessen the blow for property funds and exempt investors such as entities benefitting from sovereign immunity. The point remains, however, that from next year a few non-UK resident investors will be facing additional tax on their investments in UK property. Time will tell the effect this will have on the market as a whole and the impact on pricing.
Surcharge for foreign buyers and reduction in filing window- SDLT
Theresa May made a surprise announcement at the Conservative Party Conference in early October 2018 of proposals for an SDLT surcharge for foreign buyers of UK residential property. The surcharge is expected to be 1% but other than this, few details have been published. This is not without precedent: Canada, Singapore and New Zealand have all introduced foreign purchaser restrictions already and New South Wales introduced a 4% surcharge purchaser duty on foreign buyers in 2016 which was raised to 8% last year. It is not yet known whether there will be any exemptions from the charge but overseas investors in student accommodation, care homes and the like will be keenly watching this space. There are, however, likely to be questions as to how such a charge on non-residents can be made compliant with EU law (for so long as the UK remains subject to this).
Introduction of a 2% digital services tax and helping the high street
One of the biggest headline-grabbers from Budget 2018 was the new 2% Digital Services Tax, to be introduced from April 2020. The Chancellor acknowledged in his speech that the best solution to the difficulties of taxing the digital economy would be coordinated international action. However, pending broader international agreement, he has decided to go it alone. By targeting revenues from activities such as online marketplaces that are linked to the participation of UK users (rather than physical presence in the UK) this may go some way to addressing the perceived tax imbalance against High Street retailers.