From April, individuals who do not spend sufficient time in, or have sufficient ties with, the UK to be resident here for tax purposes but who nonetheless own a home in the UK may need to pay capital gains tax on any gains arising on the eventual sale of the property.
Currently, individuals who are resident in the UK including those who are not domiciled here (the so called "non-doms") pay CGT at either 18% or 28% on any gains arising on the disposal of their UK assets. They also pay CGT on the disposal of their overseas assets, although non-doms can opt to be taxed only on such foreign gains that are brought to or used in the UK. However, until now non-UK residents have not generally been liable to CGT on any gains, even those arising from the disposal of UK property.
The Government felt that this imbalance between the tax treatment of residents and non-residents was unfair, even in light of the obvious benefits that foreign investment brings to the UK. So, from 6 April 2015, non-UK residents will pay CGT on any gains arising on the disposal of UK residential property, even if that property is let out.
The term "disposal" includes not only sales but also gifts. They will, however, generally only pay CGT on that part of any gain that arises after the law changes on 6 April. There are various options as to how to calculate any gain and so non-residents will need to take advice to identify the most appropriate computation method and some non-resident home-owners may wish to obtain 6 April 2015 valuations for future reference. If the non-resident usually files a UK self assessment tax return any gain must be included in the appropriate year's return, otherwise any tax must be paid within 30 days of completion. Non-residents will continue to be exempt from CGT on disposals of commercial property and other assets.
The new CGT charge will apply equally to non-resident trusts, companies and partnerships which own and subsequently dispose of UK residential property, although certain diversely held companies and institutional investors are specifically excluded.
The application of the new CGT charge to non-resident companies is particularly complicated as it sits alongside the separate regime specifically targeted at discouraging the ownership of UK homes through offshore companies introduced from April 2013, which imposes an annual tax on such companies and an associated CGT charge on disposal of the property.
Principal Private Residence
In reality most of us do not pay any tax when we sell our homes because of a relief (known as principal private residence relief or "PPR") which exempts any gains arising from CGT. There are limits and exceptions for instance where the property is let out or unoccupied for limited periods or the grounds are very large. Where someone owns more than one home, whether in the UK or abroad, they can nominate which of these qualifies for PPR.
However if PPR were fully available to non-residents this might have produced an odd result as having specifically changed the law to impose a CGT charge on non-residents, many would in fact not have paid anything. Therefore, the qualification criteria for PPR will change for disposals after 5 April 2015, so that relief will only be available if the individual is tax resident in the country where the property is located or if they (or their spouse or civil partner) spend at least 90 days in the property (or other properties in that country) for each of the tax years in question. The consequence is that it will be difficult for non-residents to claim PPR and so to avoid the new CGT charge on the sale of a UK home.
Time will tell whether the imposition of CGT coupled with recent changes to SDLT and the significant increases to the annual charge on properties owned by offshore companies heralded by the Autumn Statement will deter overseas buyers from continuing to invest their wealth in the UK.
Overseas holiday homes
Finally, an unexpected casualty of the changes is UK residents who own homes abroad. They will no longer qualify for PPR on that foreign home or be able to elect for that property to qualify for PPR, unless they spend at least 90 days there in any tax year. This may prove particularly difficult in respect of holiday homes and even where the day count test is likely to be met, the owners may still need to be able to prove it by maintaining adequate records of days and nights spent at the property, which will be a new experience for many UK residents and may seem unnecessary in relation to their own home. Further, should these individuals decide to make a more permanent move abroad and become non-resident, they will now remain liable for CGT on any subsequent disposal of their UK property, possibly without the benefit of full PPR.
All of the above measures are currently in draft form only and so may be subject to change, but are currently expected to be enacted in the Finance Act 2015 before the general election.