New capital gains tax (CGT) legislation impacting non-UK residents investing in UK property funds is something you may need to be aware of. Whilst this change came into effect on 6 April 2019, it has proved to be highly complex, and a period of consultation with both fund groups and HMRC has meant little guidance and clarity for advisers and clients to date.
However, as the landscape becomes clearer, you will start to hear more about this new legislation, and you should start to consider the impact it could have on your clients. This article focuses on the impact of the new legislation for clients investing in UK property rich funds through an offshore bond.
The Act that introduced this new legislation is the Finance Act 2019 Schedule 2 Part 1 Para 12 (Schedule 5AAA TCGA92). The legislation effectively brings all disposals of UK property by non-UK residents within scope for capital gains tax. Investments in UK property include not only direct property investment but also indirect investment through vehicles such as collective investment vehicles that are considered to be UK property rich.
It is only UK property rich funds that are impacted. HMRC defines UK property rich funds as those having over 75% of their gross asset value invested in UK property. This will impact a number of funds available in the market but not all of them.
Whilst UK REITs are caught within the legislation, our understanding is that, due to the double taxation treaties that exist with the Isle of Man and Ireland, the tax charge will not apply.
Old Mutual International has been liaising with fund managers to understand which of its current fund holdings would fall within the scope of the legislation. You can find an up to date list of property funds we currently hold that we believe are impacted on this funds list.
Impact on offshore bond clients
If your clients hold UK property rich funds through an offshore bond, then they are impacted. As the offshore bond provider is the legal and beneficial owner of the investments held within the bond, the funds will be deemed to be held by a non-UK resident. All Isle of Man and Ireland based offshore bond providers, including Old Mutual International Isle of Man Limited and Old Mutual International Ireland dac are therefore impacted.
How it works
Within an offshore bond, when an impacted property fund is sold, any gain on that fund since it was purchased (or since 6 April 2019 if purchased before this date) will be subject to tax. The offshore bond provider is liable for this tax and will pay any amount due to HMRC.
For offshore bonds held with Old Mutual International, we will calculate and pay any tax due through corporation tax at the current rate of 19% (this will reduce to 17% from 1 April 2020). The tax paid will then be passed on to policyholders as a policy charge in accordance with their policy terms.
Unfortunately, policyholders cannot offset this policy charge against any tax they may owe when calculating the gain on their policy. This will essentially result in double taxation, leading to an unfavourable tax position for clients.
A number of your offshore bond clients may not want to incur this double taxation, so you should contact them to discuss the options available.
Things to consider when seeing your clients:
- What impact might the additional policy charge have on the fund performance?
- How important is the property fund to my client’s portfolio, including any diversification, asset allocation and risk profile considerations?
- Are there alternative property funds available that are not impacted by the legislation that could provide a suitable alternative?
- What are the costs involved in switching funds?
Old Mutual International intends to start to apply this new policy charge from 2020 onwards once clients have been provided with notice of the change. In the meantime, you have time to discuss these changes with your client, and if they wish to switch out of these impacted funds they can do so before the charge is applied on disposals. Click here for a client facing sales aid to help you in these conversations.
Some offshore bond providers may decide to remove access to these funds due to the negative impact the double taxation is likely to have on policyholders. Old Mutual International is not taking any such action at this point in time, as we believe advisers should have time to consider the implication of this change on their clients, and make the right decision for them. We will continue to review and monitor the situation, gather adviser feedback, and assess ongoing demand before making any long-term decisions in relation to UK property rich funds.
This article is based on Old Mutual International's interpretation of the law and HM Revenue and Customs practice as at October 2019. We believe this interpretation is correct, but cannot guarantee it. Tax relief and the tax treatment of investment funds may change.