TQOTW: Qualifying Interest Relief

I act for a Non-UK Resident company which undertakes a rental property business in the UK. The shareholder of the company who is a non- resident and non-UK domiciled individual is thinking of gifting all his shares in the company into an offshore family trust. Please can you comment on the UK tax implications for the company and for him personally?

Income Tax/ Corporation Tax

There are no UK tax implications for the company but it may be useful to briefly outline the recent tax changes to such companies.

Historically, non-resident companies with UK property rental businesses were within the income tax regime on the profits generated on that business. Further, there was also a requirement for them to submit a SA700.  Additionally, since 6 April 2019, all non-resident companies are within the charge to UK corporation tax (“CT”) if they dispose any UK land (s.1 (2) TCGA 1992 and s.2B TCGA 1992). As such, in 2019/20 a non-resident company would have had to submit a SA700 for the rental profits and a CT600 to report any gains on disposals.

From 6 April 2020, non- resident companies, carrying on a UK property business, have been brought in within the charge to CT on their profits. The losses of a UK property business are also within the CT loss relief rules and, in particular, within to the general 50% restriction on profits over £5m against which carried-forward losses may be relieved.  Part 3 Sch 5 FA 2019 provides the commencement and transitional rules.

All non-resident landlord companies should notify HMRC of the obligation to CT no later than three months after the beginning of its first accounting period (i.e. 6 July 2020). UK law requires businesses to submit accounts to support their CT return when filing it online alongside the tax computation for the period.

CT returns and computations must be filed using Inline eXtensible Business Reporting Language (iXBRL). Whether or not the supporting accounts must also be filed in iXBRL format will depend on your circumstances.

Inheritance Tax Considerations (“IHT”)

Under general principles, UK domiciled individuals or “deemed UK domiciled” (as defined in s.267 IHTA 1984) are within the scope of IHT on their worldwide assets and prior to 6 April 2017, non-UK domiciliaries were within the charge to IHT only in respect of their UK assets. Whether an asset is UK situs is a matter of general law but specifically, shares are located where the shares register are kept.

s.6 (1) IHTA 1984 dictates that “property situated outside the United Kingdom is excluded property if the person beneficially entitled to it is an individual domiciled outside the United Kingdom”. The previous s.48 (3) IHTA 1984 also dictated that foreign property held in a trust made by a settlor who was non-UK domiciled at the time the trust was created is excluded property for IHT.  As such, without any anti -avoidance the disposition of foreign property by your client (except reversionary interests in it) would have been outside the scope of IHT.

F(No2) Act 2017 however introduced Sch. A1 IHTA 1984 which makes it necessary to examine the type of foreign asset before advising on excluded property. The main change affects shareholdings of 5% or more in close companies which have interests in UK residential property (ies) (Sch A1 (1) IHTA 1984).  After 6 April 2017, these shareholdings are now not excluded property under s.6 and s.48 (3). See HMRC manual at IHTM04311. It is now possible for a non-domiciled individual to trigger a chargeable lifetime transfer on certain types of foreign assets. In unlikely cases, where shareholdings are diverse and are less than 5%, these would still be excluded property under the above rules.

An immediate chargeable lifetime transfer is charged at 20% on the balance after deducting the nil rate band currently £325,000. A highly valued shareholding may make such planning less desirable to your client but if they want to proceed, it is critical for them to obtain a formal valuation of the shares.

Finally, as it is will be a relevant property trust, the trustees will need to consider the decennial charge for quarters after 6 April 2017 (s.65 (4) IHTA 1984) and potential exit charges when the shares leave the trust.

Capital Gains and Possible Relief (“CGT”)

FA 2019 widened the scope of CGT for non- residents and the “new” rules which came into effect for disposals post 6 April 2019 now bring non UK residents within the charge to CGT on certain disposals (see s.1A (3) TCGA 1992). These include disposals of assets that derive at least 75% of their value from UK land (see s.1A (3)(c) TCGA 1992, for instance on shares in a “property rich company”.

Broadly, a property rich company is one which at the time of disposal, derives at least 75% of the total gross market value of its assets from interests in UK land (Sch. 1A Part 2 TCGA 1992). Additionally for CGT to apply, the shareholder must have a ‘substantial indirect interest’ in the UK land (see Sch. 1A Part 3 TCGA 1992) which in this case the client has. For more extensive commentary on the indirect disposals of UK land, please see an earlier article at Indirect Disposals of UK Land. HMRC’s commentary on the provisions can be found in their manuals at CG73930P.

Assuming your client does have a substantial interest in a property rich company, the CGT computation will be deemed consideration of market value at the date of disposal (s18 TCGA 1992) less the deemed cost (rebased to market value at 6th April 2019 – Sch. 4AA TCGA 1992). Whether there is a gain depends on the share valuations at these two dates. If the gain exceeds the annual exemption, then a CGT liability may arise and holdover relief needs to be considered.

As a non-domiciliary your client will now have an immediate chargeable lifetime transfer to IHT as we have seen above which means there is scope for potential holdover relief under s.260 TCGA 1992 unless it is denied under s.260 (2) (b) TCGA 1992. Although s.261 TCGA 1992 denies a s.260 hold-over relief where the donee/ recipient is non-resident, s.261ZA allows for a hold-over claim to be made where the transferor meets the “non-residence condition” (defined in s.261ZA (6) 1992- by virtue of s. 1A (3) (b) (c ) TCGA 1992  or s.1G (2) TCGA 1992 i.e. the overseas part of a split year).

A pre-requisite of the s.261ZA claim is that the gain still has to qualify under s.260 (2) TCGA 1992 which it does here owing to the chargeable transfer to the trust falling within s.260 (2)(a).

If your client is able to make the claim, using HS295 form, the effect is that the post April 2019 gain is held-over. The base cost of the shares will remain at market value at the date of the gift. Instead the gain for your client will be deferred and added to the chargeable gain/loss that arise on the actual disposal by the transferee (s.261ZA (4) TCGA 1992).


It would seem that the UK IHT liability will be the main concern rather than CGT, owing to the availability of re-basing for CGT and the possibility of holdover relief. The IHT charge needs to be quantified to allow your client to consider whether the charge involved is acceptable for them to proceed with the proposed transfer.

If there is a CGT liability, then holdover relief will be available if the conditions are met but the draft trust deed should be checked carefully to ensure that holdover relief is not denied in the circumstances outlined above.

The above comments are only a broad overview of the issues involved, the CGT rules particularly are somewhat complex. A full review is recommended before any action is taken. Remember also the 30 day reporting requirements for CGT – Sch. 2 FA 2019.


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Tax Adviser
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Prior to joining the team, Ibrahim worked in boutique wealth and tax advisory firms where he dealt with owner-managed businesses and high net worth individuals. He also spent over three years managing the operations of a leading fiduciary firm in Cyprus, specialising in offshore trusts. Ibrahim is a member of the Association of Tax Technicians and is currently in the middle of studying to become a Chartered Tax Adviser.

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