The applicable legislation has at its heart two main tests. The first test is that the asset being disposed of derives at least 75% of its value from UK land. The second is that the person making the disposal has a substantial (25% or more) indirect interest in the UK land. Both tests are complex with defined terms which only apply to this legislation, and each investor will need to be considered in isolation, but there are some quick tests that can narrow the number of investors that need to be considered in detail.
The 75% value test excludes land and property ‘used for trading purposes’ so if a company does not have any non-trade land or property its investors may not need to be considered further. There is no minimum time period for the use of the asset but the legislation does require the trade to be ongoing and to have been carried on for at least 12 months (although not necessarily by the same entity).
The value test is applied as at the date of the disposal of the asset. In simple terms, any corporate clients whose total asset market value is 26% or more derived from assets other than land or property can be ignored when determining which investors might be affected.
The test looks at all assets, including those not recognised on the balance sheet such as goodwill. Assets which are owned indirectly are encompassed in the measure of total asset value. Any interest in another entity must be “looked through” and the proportionate value of its assets accumulated with the assets of the entity under consideration. There are reductions to asset values for ‘matching related liabilities’.
A substantial interest (25% or more) in a company has its own defined term and captures investors who have 25% or more voting rights, but also a 25% or more right to income, assets on a winding up or, proceeds in a hypothetical sale of all equity. The interests of connected persons must be considered in combination to determine whether the interest threshold is breached. Connected persons has a unique definition for the purpose of indirect disposals.
The substantial interest test can be met at any point in the two years prior to disposal and is not limited to individuals but captures corporate investors, trustees, partnerships and other entities. Any investor who has not met the 25% interest test at any point in the last two years is not within the scope of UK CGT.
Having narrowed the number of investors to be considered in detail, the legislation should now be applied to those investors to determine whether they are caught. The relevant legislation can be found in TCGA 1992 Schedule 1A and Schedule 5AA. HMRC have yet to update their manuals but draft manual pages can be found at http://www.hmrc.gov.uk/gds/cg/attachments/CG-APP14__Non-resident_capital_gains_from_6_April_2019_draft_guidance.pdf.
Croner-I commentary on the legislation, including worked examples, can be found at https://library.croneri.co.uk/cch_uk/btr/503-taxa-14.
If, after applying the tests, the legislation bring some investors into the scope of UK CGT there are some important points to remember:
- If an individual makes a disposal of an investment they will be required to make an NRCGT return within 30 days of the disposal. CGT will be payable at the appropriate rate (currently 20%).
- Corporate investors will be brought into the scope of UK corporation tax on a disposal (currently 19%) and will be required to submit form CT600 reporting the disposal. Ordinary notification of liability, filing and payment deadlines apply.
- The legislation applies to asset disposals which take place on or after 6 April 2019. Assets are automatically rebased by assuming they were disposed of and immediately re-acquired at market value on 5 April 2019 (although by election original cost can be used in the computation).
- There is an anti-avoidance provision which captures disposals where arrangements have been entered into where the main purpose, or one of the main purposes, of the arrangement was to secure a tax advantage. Given the international aspects, this includes actions which reduce UK tax liabilities by virtue of double taxation relief.
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