Until now, non-UK residents have generally been able to dispose of UK property without incurring a liability to Capital Gains Tax (CGT) but from 6 April this will change and non-residents will be subject to CGT on disposals of UK residential property. The term “disposal” includes not only a sale but also a gift, so those considering gifts to, say, children also need to take note of this change. The proposals were originally announced in the 2013 Autumn Statement but following publication of the draft legislation for inclusion in the Finance Bill 2015, full details are now available.
Individuals will pay CGT on any gain at the usual CGT rates, either 18% or 28%, and any losses can be offset against other gains on the disposal of UK residential property and against any gains if they subsequently become UK resident. The charge applies to disposals of any interest in UK property used or suitable for use as a dwelling including let property, although communal dwellings such as student accommodation and nursing homes are excluded. Non-residents will continue to be exempt from CGT on disposals of commercial property and other assets.
There are provisions for rebasing so that by default only the rise in value between the market value as at 6 April 2015 and sale will be subject to the charge. Alternatively the vendor can elect for the gain to be taxed on a time apportionment basis e.g. if the property was owned for 50% of the time prior to 6 April 2015 and 50% after, 50% of the gain will be taxable under the new rules. This option is not available where part of the gain falls within the ATED rules - see below. Another alternative is that an election can be made to use the normal method of calculating CGT and so effectively to ignore rebasing, which may be helpful where the property has made a loss since purchase. Advice will therefore be required prior to disposal on the most tax efficient method of calculating the gain. If the vendor already files UK tax returns, any tax due should be included in the return for the tax year in which the gain arises. Otherwise payment is due within 30 days of completion.
Principal Private Residence Relief (PPR) is a valuable relief which often prevents any CGT charge arising on the sale of an individual’s main home. PPR will be available to non-residents, but the qualifying criteria is being narrowed from 6 April 2015 so that, in addition to meeting the existing criteria, the taxpayer either has to be resident in the territory in which their house is situated or meet the day count test i.e. they or their spouse must spend at least 90 nights in the property in any tax year. (If the house is only owned for part of the year, the day count test is reduced proportionately and where there is more than one property in a territory, the 90 day test can be spread across all or both of those properties.) In many cases spending 90 days in the UK each year will make an individual UK resident anyway, in which case although they may be entitled to PPR on any disposal of their UK home, they will be within the UK tax net for all other income tax and CGT purposes. Careful consideration will therefore need to be given as to whether it is desirable for a particular non-resident individual to attempt to preserve a PPR claim, possibly at the expense of abandoning their non-UK resident status, bearing in mind that there is not a one-off test for PPR at the date of sale – for every tax year after April 2015 that either the residence criteria or day count test is not met, a proportion of PPR will be lost.
The new CGT charge will also apply to non-resident trusts, companies and partnerships. Non-resident trusts will pay CGT on the disposal of UK residential property as it arises at the trustees' rate of 28% and the gain will not therefore be taxed on any UK resident and domiciled settlor with an interest in the trust, nor go into the tax pool to be matched against any benefits received by UK resident beneficiaries. PPR may be available where a beneficiary occupies a trust property as their main residence under the terms of the trust provided they are either UK resident or meet the day count test.
The application of the new CGT charge to non-resident companies and the interaction with existing anti-avoidance provisions is particularly complicated. Where a company is within the scope of the new CGT charge the rate will be 20%, the same as the corporation tax rate. Diversely held companies and institutional investors are specifically excluded from the charge but residential property let out by other companies even on a commercial basis is not. This creates a mismatch with the Annual Tax on Enveloped Dwellings (ATED) legislation which imposes an annual charge on “high value” residential properties owned by companies and a special CGT charge on gains arising on the disposal of such property, whereby let residential property is generally excluded both from payment of the annual charge and the ATED related CGT charge. (Currently ATED applies to properties worth £2million or over but this limit will be reduced to £1million from April 2015 and £500,000 from April 2016. In addition it was announced in the recent Autumn Statement that the annual levies will increase by 50% from this April.)
Where a company does pay the annual charge, the ATED related CGT charge, which is levied at 28%, will take priority over the new CGT charge. Equally the new CGT charge will take priority over the anti-avoidance provisions in section 13 of the Taxation of Chargeable Gains Act (s13) whereby gains arising to offshore companies sometimes fall to be taxed on a UK resident shareholder. The scope of s13 has in any event substantially narrowed in recent years as it no longer applies where CGT or Corporation tax avoidance was not a motive and late last year the ECJ held that the unamended provisions of s13 were contrary to EU law.
Partnerships will be treated as transparent meaning that each partner (be it a company, trust or an individual) will be taxed at the relevant rate on its proportion of the gain.
Although the final proposals are broadly as expected, the introduction of the CGT charge on non-residents disposing of UK residential property is going to change the tax planning landscape for both non-residents and short term UK residents who own property in the UK.
