New legislation, effective from 5 July 2016, removed the current territorial restriction on taxing profits arising from the sale of UK land that was acquired or developed for trading purposes.

This means that companies are now subject to UK corporation tax in respect of trading profits arising from the sale of UK land, regardless of the residence of the company carrying on the trade, regardless of where the trade is carried on and regardless of whether or not the trade is carried on through a PE (whether in the United Kingdom or elsewhere).

UK land includes building and structures, any estate, interest or right in or over land and also land under sea or otherwise covered by water.

The rules are designed to capture the whole profit relating to a UK property trade and these profits will be chargeable to UK corporation tax (where made by a company).

Profits, gains (or losses) obtained from a disposal of any land in the UK (by the person holding it or certain other connected persons) are to be treated as trading income (or losses) where any one of the following conditions A to D are met:

1. The main purpose, or one of the main purposes, of acquiring the land was to realise a profit or gain from disposing of the Land;
2. The main purpose, or one of the main purposes, of acquiring any property deriving its value from the land was to realise a profit or gain from disposing of the land;
3. The land is held as trading stock;
4. In a case where the land has been developed, the main purpose, or one of the main purposes, of developing the land was to realise a profit or gain from disposing of the land when developed.

It is noted that the ‘sole or main object’ test in the previous legislation has been replaced: realising a profit on disposal now only needs to be ‘one of the main purposes’. This raises the possibility that the new rules apply to a broader range of transactions, as almost any property investment will be made with a potential future disposal in mind.

However, in general where a property is acquired and held with the intention of realising long-term rental profits and/or capital appreciation, the rules should not apply

Anti-enveloping rule

The anti-enveloping provisions prevent property traders and developers from avoiding a charge to income by selling assets that derive their value from land, rather than selling the land itself. The typical example (but by no means the only one) would be where shares in a property-holding company are sold.

Although this kind of anti-enveloping measure existed before, the new rule has a much broader scope and applies when a person:

• Disposes of any property that (at the time of the disposal) derives at least 50% of its value from UK land; and
• Is ‘a party to, or concerned in, an arrangement’ relating to that land, and the main (or one of the main purposes) of that arrangement is:
• To deal in or develop the land; and
• Realise a profit or gain from a disposal of property deriving whole or part of its value from that land.