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Offshore investors to suffer new tax


16. October 2019

The UK Government has introduced a new Capital Gains Tax (CGT) that applies to offshore investors. Investors that use Personal Portfolio Bonds (known as PPB's) to access UK Property funds will now be subject to the new tax on all capital gains from their property fund holdings. This new tax can result in a double taxation burden.

New tax rules for investing in UK property funds.

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 to date.

However, as the landscape becomes clearer investors should start to consider the impact it could have on their portfolios. This blog focuses on the impact of the new legislation for those investing in UK property rich funds through an Offshore Portfolio Bond also known as a PPB.

Background

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.

Funds impacted

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, general consensus is that, due to the double taxation treaties that exist with the Isle of Man and Ireland, the tax charge will not apply. 

Impact on offshore bond investors

If you 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.

For example all Isle of Man and Ireland based offshore bond providers, 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.

Most offshore bond providers 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 a very unfavourable tax position for investors.

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 a very unfavourable tax position for investors.

Action

A number of investors may not want to incur this double taxation, so you should seek advice to discuss the options available.

Things to consider

  • What impact might the additional policy charge have on the fund performance?

  • How important is the property fund to your 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?

  • Should contemplate using a discretionary fund manager

Some offshore bond providers may decide to remove access to these types of funds due to the negative impact the double taxation is likely to have on policyholders.

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