New tax charge
A new regime which will charge non-UK tax resident owners of UK residential property to capital gains tax (CGT) is due to come into force on 6 April 2015. The draft legislation was published as part of Finance Bill 2015 on 10 December 2014, after an extensive consultation period from 28 March 2014 to 20 June 2014.
This new regime reiterates the underlying ideal of the annual tax on enveloped dwellings (ATED) introduced in April 2013. Both taxes represent a move away from a tax system focusing on the taxpayer and their income/gains, towards a system which focuses on taxing the asset either simply on holding it or when selling a UK situs asset. The Government seems to be using these property taxes in an aggressive manner to try to equalise a perceived wealth gap. Such previously anathematic taxes will need to hold up to scrutiny as they could easily be criticised for being far too political in nature, which could undermine the integrity of the tax system.
The basic premise of the new nonresident CGT (NRCGT) charge, contained in new TCGA 1992, s 7AA, is that NRCGT will be chargeable on any person with a chargeable relevant gain on the disposal of a UK residential property interest, who does not meet the residence criteria. “Person” includes individuals (including partners in a partnership), companies and trusts. Commercial property is outside the scope of the charge.
The residence of individuals will be determined according to the statutory residence test as contained in FA 2013, Sch 45, which is itself not without complications.
A UK residential property interest refers primarily to a dwelling either used as a residence or suitable for use as such (communal accommodation is excluded from the charge). It may be necessary to pay close attention to the provisions defining a dwelling where there is a proposed change of use from office use to residential. Unfortunately the legislation as drafted does not simply lift the definition of “dwelling” from the ATED provisions, so there is scope for some confusion. A chargeable relevant gain is either the actual gain accruing after 5 April 2015, or a proportion of the gain if an election is made for a straight line apportionment.
Diversely held companies
Whether a company comes within the charge to the NRCGT depends on whether it is considered to be “diversely held”, and if so that company needs to make an election to claim such status under new TCGA 1992, s7AA(6). Diversely held companies are outside the charge to NRCGT.
A company will be diversely held if it is not a close company. The meaning of “closely held” refers to a company under the control of five or fewer participators. The definition does not mirror the definition of close company contained in CTA 2010, s 439.
The draft legislation also includes a TAAR to cover “any arrangements entered into where the main purpose or one of the main purposes is to avoid” the NRCGT charge. How this will be applied and implemented remains to be seen.
The draft legislation contains an option for group companies to make pooling elections with respect to all gains and losses incurred under the NRCGT charge. The definition of group in this instance is curious as it makes reference to companies being associated if they meet the UK GAAP consolidation condition. Why the existing definition of a group under TCGA 1992, s 170 is not used is unclear.
Interaction with the ATED
The NRCGT charge has been introduced at a time when the scope of the ATED is being extended. By April 2016 ATED-related CGT and the ATED charge will apply to all enveloped properties with a value in excess of £500,000. What’s more the rates for the ATED charge will increase dramatically.
It may not be surprising that calls by tax practitioners for the abolition of the ATED-related CGT charge were resisted by the Government. Their justification is that the policy objective regarding ATED is entirely different and intended to attack enveloped dwellings, so the ATED-related CGT charge cannot be replaced by a tax with a different policy objective. In fact the new NRCGT legislation spends many pages dealing with its interaction with the ATED charge. In general the ATED CGT charge takes priority.
A trust, with a non-dom settlor, owns a company, which in turns owns a UK property. A re-basing election was made in 2008. The property must be valued at the end of each of the periods indicated below, in order to calculate the element of the gain subject to the relevant tax rate for each period.
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The result of the retention of both tax charges is that many CGT calculations on properties being disposed of after 5 April 2015 could potentially be very complex (see example).
There is no evidence so far of any exemptions or reliefs from the NRCGT, to mirror those available under ATED, nor are there any valuation thresholds as there are with ATED.
Main residence relief
During the consultation period there was a widespread fear regarding changes to the main residence CGT exemption. The Government has tried hard to retain the current system while protecting it from obvious abuse when non-residents might elect for their UK property to be their main residence, even if they do not really occupy it as such. What has emerged still has some creases to be ironed out.
The rules will state at TCGA 1992, s 222A that a dwelling cannot be considered as occupied by an individual for the purposes of the relief during a year of ownership, when the individual is not resident and has not spent 90 days (midnights) in a dwelling owned by them in that territory during the tax year. Presence of a spouse will count as presence by the individual. The legislation as drafted doesn’t deal with the relief available in TCGA 1992, s 225 for beneficiaries occupying the property under the terms of the trust, but the next draft of the legislation is set to address this point.
The revised main residence relief will impact on UK residents with homes overseas as much as it will on non-residents with homes in the UK. One problem already foreseen is the curious reference under TCGA 1992, s 222A(7), to an individual’s liability to tax when looking at their residence or presence in a territory for 90 days. The draft legislation seems to suggest that if the taxpayer is resident in say Dubai, where the sale of a property would not be subject to tax, then main residence relief cannot be claimed.
A strong lobbying group is searching to secure a relaxation of the TCGA 1992, s 222 test in relation to individuals who leave the UK to undertake full time work overseas and dispose of their property while they are non-resident. To force these individuals to rely on the TCGA 1992, s 223(3) periods of absence to protect their gain seems overly draconian. It will also be difficult to apply as this test requires all duties to be performed abroad, whereas the statutory residence test (SRT) does not. The SRT requires the individual to satisfy entirely separate and complex tests to meet a full time work abroad test.
It also seems odd that a non-resident individual is not subject to the existing TCGA 1992, s 222(5) requirement to make an election to nominate a property as their main residence within two years of starting to use the property as a home. Instead, such election can be made at the time of disposal under TCGA 1992, s 222(5B). Perhaps those time limits will be aligned in the next incarnation of the draft legislation as this is bound to be confusing, especially for people returning to the UK.
Consider a non-UK resident taxpayer who plans to dispose of a UK residential property (that he has held for a while but is not his main residence), and he also plans to return to the UK in 2015/16, not necessarily in that order. It seems that the taxpayer would be in a substantially better position if he were to dispose prior to becoming UK resident, as he would benefit from the 6 April 2015 re-basing, and therefore no gain would in fact occur. Whereas if he were a UK resident taxpayer disposing of the same property he would be subject to a substantial CGT charge.
There is surely still work to be done on this draft legislation. Perhaps the Government has gone some way to achieving its objective of fairness, but we eagerly await the tweaks that are inevitable before Finance Bill 2015 can become law. Not least because the provisions in relation to a collection mechanism for the new charge, and the new NRCGT interaction with TCGA 1992, s 10A and Schs 4B and 4C have not yet seen the light of day.
Section 10A is an existing antiavoidance mechanism for treating certain gains made by “temporary nonresidents” as accruing to the individual on the year of their return to the UK. Schedules 4B and 4C are complex provisions that deem offshore trustees to have made a disposal of trust assets where transfers are made between trusts with loan agreements in place and there is subsequent capital distribution.
This article was first published in Practical Tax Newsletter, Volume 36, Part 5, March 2015