UK CGT changes will impact the hotel market: An expert view

The taxation of UK hotel transactions for non-residents is changing and will likely have an impact on the pricing of hotel property going forward.

Scope of the Capital Gains Tax (CGT) changes

HMRC is making a change to remove a tax advantage which non-UK residents have over those in the UK regarding commercial property (it follows on from changes in 2015 that affected residential property). Until April 2019 Capital Gains Tax (CGT) for non-UK residents only applied to disposals of UK residential property held by ‘closely held’ companies. The CGT net will be extended to apply to disposal of commercial property owned by widely-held non-UK resident companies.

Disposal of interests in “property rich” holding entities

The disposal, by non-UK residents, of interests in property holding companies, trusts and partnerships has, until now, been outside the scope of CGT. This will no longer be the case from April 2019. There are of course rules concerning the computation of ownership thresholds, time the asset has been held and re-basing the acquisition cost. As ever, any non-UK resident investor in UK hotels is advised to seek specialist advice.

Levelling the playing field

Looking further ahead to next April, non-UK resident companies that have 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 real estate in very similar UK tax positions from 2020.

As non-UK resident investors will be facing additional tax on their investments in UK hotels that there will be impacts on asset pricing.

The expert’s view

Barry Laurie is a former Inspector of Taxes for HMRC and is a tax partner with accountants and tax advisers French Duncan LLP. He has acted successfully for many of our clients over many years. He and his team have extensive experience in advising the Hospitality industry. We asked Barry about the impact the changes will have on the market.

Avison Young: the rules around this legislation are complex, and on the face of it there appears to be issues for Non-resident property companies holding or considering hotel assets?

Barry Laurie: As you’ll be aware international hotel businesses trading in the UK have historically used an Opco – Propco structure to separate their operations from asset ownership. Propco is typically a non-UK resident company, incorporated for example in Luxembourg, whilst the Opco is a UK resident company.

Opco was subject to UK corporation tax on its profits. Propco was liable to UK income tax on its rental income from the UK properties. However any capital gains on the sale of the UK properties were outside the scope of UK taxation.

 

As you note, from 6 April 2019 any gains (or losses) made by these non-resident Propco’s are within the scope of UK capital gains tax. This charge in many cases extends to the disposal of shares in Propco.

In the future investors will have to consider whether there is commercial merit to their business structure. They should review whether it would be simpler to structure using UK resident companies only or whether there is a suitable alternative structure available to them.

There are also further changes on the horizon and from 6 April 2020 these same non-UK resident Propco’s will become subject to UK corporation tax on all profits and gains, rather than income tax and capital gains tax as at present. The applicable rate will be 17%, which is better than the current 20% income tax rate. In addition, where both the Propco and Opco are subject to UK corporation tax the tenant and landlord positions will be mirrored.

Avison Young: So are there any opportunities for our clients regarding NRCGT? How could you help them?

Barry Laurie: I previously touched on the possibility that shares in Propco could also be subject to CGT. That isn’t necessarily the case as there are some exemptions available which we can advise on, as well as weighing up the tax pros and cons of an asset sale versus a share sale.

In addition there is an important relaxation in these rules for existing structures. The rules apply to tax gains on all disposals from 6 April 2019, including assets bought before that. As it would be unfair to tax the entire gain in these situations, property acquired before 6 April 2019 will be ‘rebased’ for tax purposes. This means that the tax deductible cost for future capital gains tax calculations will be the market value as at 6 April 2019. Whilst it’s possible to obtain retrospective valuations a contemporary valuation may be more reliable and less likely to be challenged by the UK tax authorities when reporting a future disposal.

There will also be a potential benefit when Propco becomes liable to corporation tax in 2020. This will enable Propco and Opco to form a UK tax group provided both have at least 75% common ownership. This opens up opportunities to transfer losses intercompany, defer capital gains, obtain relief on the disposal of certain qualifying shareholdings etc.

Finally, in my experience, it is not uncommon for tax reliefs such as capital allowances to have been overlooked in Propcos. Whilst a capital allowances claim in Propco will not impact on the CGT these can be extremely valuable and may go a long way to reducing the taxable profits of the company. For hotels these tax savings could equate to as much as 10% of the cost of the asset. As well as identifying and quantifying a claim, careful negotiation is also required on any acquisition or disposal in order to maximise your entitlement.

As ever good advice and planning are essential. If you have a hospitality project you would like to discuss please do get in touch.