New Capital Gains Tax for Non-UK Residents

24 / 12 / 2014

Background

In 2013, George Osborne announced in his Autumn Statement that a new capital gains tax (CGT) charge would be introduced from April 2015 in relation to non-UK residents who own UK residential property.  A consultation paper was circulated in March, at the end of last month the Government published a summary of its response to it and legislation is included in the draft Finance Bill published on 10 December 2014.  The new regime is being put in place to counter the perceived unfairness of the current situation and to bring the UK into line with  “many other countries around the world that charge capital gains tax on the basis of where a property is located“.

Current regime

The disposal of UK residential property (worth less than £2,000,000) by any non-resident is not subject to CGT.  In fact, the disposal of such property of any value by an individual or trust is not subject to CGT.  However, since 6 April 2013 non-natural persons (such as companies or partnerships where one of the partners is a corporate entity) who dispose of UK residential property worth more than £2,000,000 (on 1 April 2012) are subject to a CGT charge related to the annual tax on enveloped dwellings (ATED).  There are some exemptions from ATED and its related CGT charge, e.g. if the property is let out commercially, being redeveloped or held for charitable purposes  (see our client bulletin entitled “Taxation of high value UK residential property“).

Unfairness

The unfairness stems from the fact that UK resident individuals are subject to CGT on the sale of residential property which is not their main home and similarly UK resident companies are also subject to UK corporation tax on the disposal of residential property.  The Government believe this should be the case for non-residents as well.

New CGT charge

When? It will apply to gains arising from 6 April 2015.

What?  It will apply to residential property used or suitable for use as a dwelling.  There is no minimum threshold and qualifying properties of any value will be taxable.  This includes property being constructed/converted for such use but building land will be outside the scope of the charge until construction commences.  This contrasts with a purchase of “off plan” residential property which is treated as the purchase of a completed dwelling and as such chargeable.  The charge will not apply to some communal residential property such as boarding schools or care homes nor purpose built student accommodation.  However, smaller scale properties used to provide student accommodation (such as converted family homes or a portfolio of rental properties) will be caught.

Who?  Individuals, partnerships, trustees and companies (the latter are subject to a “narrowly controlled” test, i.e. where the owners comprise five or fewer individuals or closely controlled companies).

Who is not?  Shareholders, unitholders, pension funds, REITS (real estate investment trusts) and funds (the latter are subject to a “genuine diversity of ownership” test to prevent abuse). 

How?

Computation:

  • Taxpayers may choose either of:
    • rebasing to market value as at 6 April 2015(the default position);
    • time apportioning the whole gain over the period of ownership; or
    • computing the gains/losses over the whole period of ownership.
    • Losses are ring-fenced and can only be used to offset gains on residential property although they can be carried forward.
    • Aside from ATED, the new CGT charge takes priority over all other existing anti-avoidance legislation relating to gains made by offshore companies and trust.
    • Concurrent mixed-use properties can benefit from a fair and reasonable apportionment.
    • Pooling arrangements will be available to non-resident companies and groups.

Rate of Tax:

  • Individuals at marginal capital gains tax rates (18% or 28%) with an annual exempt amount (£11,100 fro 2015/16).
  • ATED companies at the rate of ATED CGT (28%) which takes priority.
  • Companies at the rate of corporation tax (20%) with a form of indexation allowance.
  • Trustees at a flat CGT rate of 28% with a restricted 50% annual exempt amount (£5,550 for  2015/16).
  • Partners as if they were individuals with gains apportioned between UK resident and non-resident partners.

PPR:

  • Ability to nominate a property as a principal private residence remains.
  • The person must spend at least 90 midnights in the property in that tax year.
  • If an individual has more than one property in the same jurisdiction, the 90 midnights can comprise nights in any of them in the relevant tax year.
  • Occupation by one spouse will count as occupation by the other.
  • Available to trusts where a beneficiary meets the criteria.
  • These new PPR rules will apply to non-UK and UK resident individuals.

Proposed compliance:

  • Notification by non-resident within 30 days of disposal of the property (including a PPR election as appropriate); this is even the case where a loss arises or the gain is covered by the annual exempt amount.
  • Non-residents who already submit a self-assessment tax return may pay tax within the normal time limits.
  • A “payment on account” regime is to be introduced for non-residents who do not already submit a tax return as they will have to pay and report at the same time, i.e. within 30 days.
  • Amendments to the return permitted within 12 months of the normal filing date.

ACTION

  • Existing property structures: take immediate specialist advice on whether any action should be taken now to mitigate tax.
  • New purchases: take advice prior to purchase to consider which structure is best from the perspective of inheritance tax, stamp duty land tax, income tax, ATED, CGT and asset protection
  • Valuations:  obtain these for all qualifying properties as at 6 April 2015.
  • PPR:  if considering claiming PPR on a disposal, record your day counts very carefully and take advice on the UK’s new statutory residence test to avoid becoming resident and thereby triggering wider charges to income tax and capital gains tax in the UK.
  • Other points to consider: co-ownership, tax efficient Wills, trusts, life insurance and mortgages.

Should you have any queries, please do not hesitate to contact Camilla Wallace or Kate Davies.