AREF’s Tax Committee held another very popular briefing event on non-resident capital gains tax (NRCGT), discussing the basics of the new rules, the specifics for funds and what fund managers should be doing ahead of the new legislation coming into effect April 2019. This event was kindly hosted by CMS Cameron McKenna Nabarro Olswang LLP, with members of the AREF Tax Committee speaking - Nick Burt, Tax Partner at CMS UK, Leonie Webster, Partner at Deloitte and John Powlton, Head of Real Estate Tax at M&G – joined by Wayne Strangwood, HMRC Policy and Technical Lead at HMRC on hand to take questions.
Nick kicked off proceedings by welcoming the capacity crowd, introducing the speakers and laying out the agenda, which would cover the basic NRCGT rules, collective investment vehicle regime elections and practical considerations for asset managers. He also did a live poll of the audience, asking whether delegates were prepared for the new NRCGT, where 48% replied ‘yes’, 52% replied ‘no’. Then they were asked what worries them most about the new regime, where the dominant concern was ‘compliance and reporting requirements’, with 50% of the audience voting for that answer out of the five options available.
He went on to cover the basics of the new rules for both direct property and property held indirectly. He noted that the base cost could either be a rebased valuation or the historical acquisition cost, whichever was the greater. Conferring with Wayne from HMRC, it seems that a December 2018 valuation would likely be accepted for rebasing purposes, albeit with the caveat that nothing material happens over the coming month with regard to market valuations.
Leonie then walked the audience through provisions for Collective Investment Vehicles (CIVs) and the two new regimes to be considered: transparency or exemption. Both these new regimes move the tax point from the vehicle up to the investor and she walked delegates through the conditions required, the effects and the timing. Discussing the details of the transparency regime, Leonie highlighted that all investors must consent to choosing this regime and thus perhaps it is not suitable for widely held CIVs. There is twelve months to decide what to do but once the transparency regime is elected, it becomes irrevocable. The details for each can be found on her slides.
From the questions Leonie then put to Wayne, it appeared that HMRC were taking a pragmatic approach towards the need for some funds to restructure, as long as that related to the new regimes and wasn’t simply an avoidance ploy. Similarly, HMRC are unlikely to revoke regime elections just for inadvertent breaches.
John then talked the audience through what fund managers should be doing to prepare for the new rules. He discussed the election practicalities and rebasing, getting confirmation from Wayne that where investor consent is required (i.e. transparency) HMRC are not concerned with proof of consent. John also advised caution regarding open sales transactions where the regime election had yet to be made, as the assets may become liable to NRCGT.
He then discussed requirements to be ‘fit for purpose’ in preparing for and acting in these new regimes, such as updating key documents, investor information and systems needs. He emphasised the increased compliance and reporting burden.
John also talked about the practical challenges of gathering existing investor information, investor communications and the immediate and ongoing monitoring of the qualifying conditions. Conferring with Wayne from HMRC, it was clear that the reports of gains made by investors submitted by the fund to HMRC would not determine the tax liability of each investor. Each investor is required to submit their own tax return, which will decide the CGT they owe.
To conclude, John highlighted what is needed to be done now. From engaging with advisors and service providers, to understanding the additional reporting and compliance burdens, to communication with investors and collecting information from them, to implementing new processes. It was very clear there is lots to do!
AREF would like to thank all the speakers for their excellent contributions to this event, bringing some clarity to an otherwise complex subject and Wayne Strangwood from HMRC for being on hand to provide useful answers to questions and insights into HMRC viewpoints. We would also like to thank CMS for being such excellent hosts for this event. The AREF Tax Committee were heavily involved in the HMT/HMRC consultation regarding the changes to NRCGT and their work has been a resounding success and an excellent example of how AREF acts as the voice of the real estate funds industry. Together we can make a difference.