The draft legislation announced in the 2016 Budget to tax non-residents who trade in UK land or who develop UK land for resale has now been legislated in the Finance Act 2016.
The legislation extends the scope of UK tax on non-residents so as to tax such persons on profits of a trade of dealing in or developing UK land wherever the trade is carried on.
A person’s trade of dealing in or developing UK land consists of:
a) any activities of dealing in UK land or developing UK land for the purpose of disposing of it, and
b) any activities from which profits arise which are treated under the related anti-avoidance provision as profits of the person’s trade of dealing in or developing UK land.
Land includes buildings and structures, any estate interest or right in or over land, and land under the sea or otherwise covered by water.
This basic rule is supplemented by an anti-avoidance provision. This is based on the existing anti-avoidance provision which applies to artificial transactions in land. This has been largely ineffective in relation to non-residents, primarily because it excludes transactions that constitute a trade of dealing in or developing land.
The anti-avoidance provision applies if either:
a) a person acquiring, holding or developing land in the UK,
b) a person who is associated with such a person, or
c) a person who is a party to, or concerned in, an arrangement, which is effected with respect to all or part of the land, and enables a profit or gain to be realised by any indirect method or by any series of transactions, realises a profit or gain from a disposal of the land and one of four conditions are met.
The four conditions are:
a) that the main purpose (or one of the main purposes) of acquiring the land was to realise a profit or gain from disposing of the land,
b) the main purpose (or one of the main purposes) of acquiring any property deriving its value from the land was to realise a profit or gain from disposing of the land,
c) the land is held as trading stock,
d) if the land has been developed, the main purpose (or one of the main purposes) of developing the land was to realise a profit or gain from disposing of the land when developed.
a) a person realises a profit or gain from a disposal of property which (at the time of the disposal) derives at least 50% of its value from land in the UK,
b) that person is a party to (or concerned in) an arrangement concerning some or all of that land (the project land), and
d) the main purpose (or one of the main purposes) of the arrangement is to deal in or develop the project land and realise a profit or gain from a disposal of property deriving the whole or part of its value from that land.
The ‘relevant amount’ must be treated for income tax purposes as profits of a trade carried on by that person arising in the year in which the profit or gain arises (except to the extent that such amount is already taxable as income). The relevant amount is so much (if any) of the profit or gain as is attributable (on a just and reasonable apportionment) to the relevant UK assets, i.e. any land in the UK from which the property derives any of its value (at the time of the disposal).
If the anti-avoidance provision applies because land is developed with the purpose of realising a gain from its disposal when developed, and part of the profit or gain is fairly attributable to a period before the intention to develop was formed, that part of the gain is not taxable. Similarly, if the gain is from property deriving its value from the land (such as shares in a property dealing company) and part of the profit or gain is fairly attributable to a period before the person was a party to (or concerned in) the arrangement in question, that part of the profit or gain is not taxable. In applying these exclusions, account must be taken of how the taxable amount is calculated where a person appropriates land as trading stock.
These provisions do not apply to a gain accruing to an individual if the gain is exempt from CGT as a result of principal private residence relief or would be so exempt but for TCGA 1992, s 224(3) (residences acquired partly with a view to making a gain).
If a person disposed of land (or of property deriving the whole or part of its value from land) to a person who was associated with him, the disposal was made between 16 March 2016 and 4 July 2016, and a person obtains a relevant tax advantage as a result of the disposal, that tax advantage can be counteracted by HMRC.
How does this change affect non-UK resident entities?
1. A non-resident company will be chargeable to corporation tax at 20% on a profit from buying and selling UK land or from developing land for sale and selling the developed units.
2. A non-resident trust will be subject to income tax at 45% on such profits, and a non-resident individual will be subject to income tax at rates of 20% to 45% depending on the amount of the profit.
3. A non-resident developing UK land in order to retain the completed development as an investment will still be outside the scope of UK tax unless the development is a residential development (in which case capital gains tax at 28% will be payable on the eventual sale of units).
4. The anti-avoidance provision can impose tax on a third party who is not involved in developing or trading in the land, but who makes a profit or gain in connection with the development or trade, such as:
a) a person who receives a finder’s fee for introducing the site,
b) a person who sells shares in a company that holds UK land for development as trading stock, or
c) a person who is a beneficiary of a trust that acquires UK land for resale or development and who sells his interest in the trust.
However, it will do so only if the UK land is held as trading stock or is developed for resale (either before or after the third party receives his profit or gain). It will not apply if the land is acquired or held by the landowner as an investment. It will also not apply if the third party is not associated with the landowner and is not involved in an arrangement with the landowner that enables a profit or gain to be realised indirectly. ‘Associated with’ is very widely defined.
5. The anti-avoidance provision is unlikely to impose tax on:
a) a finder’s fee received by a person at arm’s length from the developer for introducing the opportunity to acquire the land to the developer, or
b) the fee of an arm’s length project manager.
However, the UK courts tend to interpret an ‘arrangement’ very broadly, so simply entering into a contract or even an understanding could constitute an arrangement – although to be caught, the arrangement needs to be one that allows a gain to be realised by an indirect method or by a series of transactions.
Robert Maas FCA, FTII, FIIT, TEP is a Consultant at CBW Tax and is author of Property Taxes 2016/17 (www.bloomsburyprofessional.com/pt1617/) and contributor to Buy-to-Let Property Tax Handbook (www.bloomsburyprofessional.com/btlpth/).
The dedicated tax team at CBW are well known for their expertise within the tax world and are regular commentators and presenters on all areas of tax (www.cbw.co.uk)