Capital gains tax for non-UK residents on residential property – the consultation

| March 31, 2014 | 0 Comments
Francis Snoding, director at Legis Tax Services

Commentary from Francis Snoding, director, Legis Tax Services Limited

HMRC has on Friday, released the consultation document on the introduction of capital gains tax (“CGT”) for non-UK residents who dispose of residential UK property, as originally announced by the government in the 2013 Autumn Statement.

Many countries collect tax on the basis of the situs of the property, as opposed to the residence of the seller. The UK has historically exempted non-residents from CGT, although the introduction of the Annual Tax on Enveloped Dwelling (“ATED”) regime in 2013, mentioned later, started to erode this principle. The new proposals revealed today seek to further extend the scope of CGT and are designed to level the playing field for UK residents and non-UK residents.

The key points of the consultation are:

  • It is aimed at gains made after April 2015. There will therefore be a notional rebasing of base costs at this date. Individuals will need to obtain professional valuations as of this date, as contemporaneous valuations will assist sellers should HMRC challenge a value on a future sale.
  • The consultation is targeting residential property that is used as a dwelling, i.e. a place that is currently or has potential of being used as a residence.
  • There is no exclusion for properties that are let, as there is in the ATED regime.
  • There will be limited exclusions for institutional accommodation used for children, halls of residence, care home accommodation and other communal accommodation, such as is used for armed forces and prisons.
  • It will target non-UK residents who own their properties through a number of different vehicles, such as companies, trusts, partnerships, and certain types of funds.
  • CGT will be apportioned to non-UK resident partners of a partnership which disposes of UK residential property.
  • Non-UK resident trusts will be caught to bring the treatment in to line with UK resident trusts.
  • Certain fund structures will also be caught although there will be exclusion for fund structures that meet a new test of genuinely diverse ownership.
  • Some funds and trusts are currently excluded, such as pension schemes. It is expected that these exclusions will continue as appropriate.
  • Foreign Real Estate Investment Trusts (“REITS”) will not be taxed under the new regime, on the basis that they are equivalent in nature to UK REITS.

In 2013 the new ATED regime was introduced, which included a CGT charge on certain residential property valued over £2million. This threshold was reduced in the 2014 budget to include properties valued at £500,000 or more. However crucially there is an exemption from the CGT element of the ATED charge if the property in question is let commercially. However the consultation issued today seeks to bring capital gains into charge irrespective of whether the property is let commercially or not. The proposals mean that if a capital gain is exempt from the ATED CGT charge then it will be subject instead to the new CGT charge.

The government will make the principle private residence election available to non-residents in the same way it is available to UK residents, although it is recognised that it will be difficult for an individual who is non-UK resident to demonstrate that a UK property is their main residence. However this may be useful for individuals who were former UK residents that have emigrated and are in the process of selling their former home.

Tax for non-UK resident individuals will be charged in line with current UK CGT rates of 18% for lower rate taxpayers and 28% for higher rate taxpayers. The annual exempt amount will also be available (currently £10,900). The rate of CGT will depend upon the total of the individuals UK taxable income and gains for the particular year. Rates for companies, funds, trusts and other non-UK resident entities will be announced at a later date.

The consultation proposes a form of withholding tax on sale to ensure the government collects any CGT that is due. This will be credited at a later date against the actual liability and an additional amount can be paid or some CGT reclaimed depending on the circumstances.

The consultation process closes in June 2014 and will likely be followed by a summary of responses and initial draft legislation, probably in autumn. It is likely there will be changes to the proposals contained within the consultation document, however the proposals in their current form illustrate the government’s intention with regards to investment in UK residential property by non-UK residents.


Category: Finance & Business

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