If the government wants to promote the UK as an attractive place for foreigners to do business, it might be sensible to adopt a coherent response to UK investments by non-residents. If Mr Hammond has one, it is hard to discern what it is.
His predecessor started the apparent disdain for foreigners in 2013 with ATED, a tax based on the premise that if people want to acquire UK houses through companies, they must be seeking to avoid tax. This is mainly imposed on foreigners because UK resident and domiciled individuals would not normally acquire their houses through a company and, by doing so, forfeit the principal private residence exemption with no counteracting benefits. The people hurt by the tax were UK-resident non-doms (where the company was an insurance against the risk of dying before the individual returned home) and non-residents who wanted to maintain a house in the UK. Of course most non-residents don’t, so those caught were, in the main, the wealthy non-residents with the luxury of having homes in several countries and also the ability to invest in those of such countries that were welcoming towards them.
Then came NRCGT, ostensibly to create fairness between residents (who do not pay CGT on their UK homes other than holiday homes) and non-residents (who the government think ought to as, by definition, they have another home somewhere else). However, fairness obviously does not mean treating people the same. It means that UK residents should pay tax up to 21 months after a disposal, but non-residents should have to do so within 30 days. It also means that UK residents should need to declare their disposals only if a gain arises, but non-residents should have to do so even if they sell at a loss. Indeed, it means that, unlike residents, non-residents should have to do a tax return within 30 days of the disposal and, if they are within the scope of self-assessment because they own UK rental property or have other UK income, should have to do a second return after the end of the tax year. In addition, of course, non-residents are expected to be avid readers of the HMRC website so are penalised if they did not realise that the UK wants non-residents to complete two tax returns when they ought to be familiar with UK law and know that this impacts more harshly on non-residents than on residents.
Now we have a two-pronged proposal to make UK investment by UK residents even less welcome. From 1 April 2019, Mr Hammond proposes to extend NRCGT not only to commercial and other non-residential property but also to shares in companies that derive a significant part of their value from UK properties. This is such a wide-ranging proposal that I decided to cover it in the new edition of Property Taxes, albeit that many of the details still have to be worked out by the government. Non-residents need to be warned against investing in the UK while Mr Hammond holds sway. As a simple example, I would not be surprised if Sainsbury’s Plc derives more than 75% of its value from UK property as its supermarkets are probably trade-related properties (where HMRC consider that the majority of the goodwill in the trade is attributable to location and thus is part of the property value, not a separate asset), albeit that its high street ‘Locals’ are probably not and so could have goodwill – but its margins are so small it is doubtful whether they do.
Non-residents are also likely to have a nightmare with groups of companies, particularly where the parent has a significant investment in a company that is not a subsidiary. They will have a particular problem if, although they own 25% of the overseas company, they have no ability to drill down into what the company owns. Mr Hammond expects them to know what UK properties may be held by sub-sub-subsidiaries of the company in which they have invested. Also, as the FTT is starting to tell us in relation to NRCGT penalties, ignorance of UK law is no excuse for a foreigner – although the FTT has yet to be asked to opine if understanding the law but not being in a position to be able to apply it might provide a reasonable excuse.
Finally, from 1 April 2020, non-resident landlord companies are to be brought within the scope of corporation tax instead of income tax. Very large companies are subject to the corporation tax interest cap and Mr Hammond thinks it unfair that very large overseas landlord companies escape this cap because it does not apply for income tax purposes. Of course, most non-resident landlord companies are far too small to be affected by this cap, but in Hammondland it is clearly sensible to subject all such companies to learning a new system to ensure that the handful of companies that would be affected by the cap have to apply it. But that comes back to knowing the law, I suppose. If non-resident landlords are deemed to know the highly complex rules on loan relationships, particularly in relation to foreign currency borrowings in their home country, it should not matter that they are used to the far simpler income tax rules on interest payable and other financing costs. They are obviously not going to make mistakes so penalties for getting it wrong will obviously be a justified reaction to those non-residents who choose not to swot up on loan relationships.
Of course, some might think that, in return for reducing the tax payable by non-resident companies from 20% to 17%, they ought to accept the risk of penalties for not understanding that the rules have changed. Others might question why, at a time when finances are tight, Mr Hammond thinks it appropriate to give a 15% tax reduction to some non-resident landlords, merely because it enables him to make the tax system look tidier.
Also, if foreigners need to learn new rules, wouldn’t it be sensible to learn the new NRCGT rules and the new corporation tax rules together? Of course not, says Mr Hammond. Let’s introduce them a year apart to increase the opportunities to collect penalties from those foreigners who have opted not to know the UK laws.
Many people think that following Brexit, the UK is going to need all the foreign friends it can get. It’s interesting that Mr Hammond seems to feel otherwise.