Background

The UK residential property market has been particularly attractive to foreign (non-UK resident) investors for many years as they have been able to benefit from not having to pay capital gains tax ('CGT') on gains realised on selling the property. From April 2013 CGT was imposed on the sale of residential property by non-UK resident companies which fell within the Annual Tax on Enveloped Dwellings ('ATED'). The UK government has said that the difference in the way foreign owners and UK resident owners are treated needs to be addressed and in 2013 the Chancellor of the Exchequer announced the government's intention to extend the CGT regime to include gains realised from the sale of residential property by all foreign owners.  These changes come into force on 6 April 2015.

Scope of the rules

All gains arising from April 2015 made on the sale of UK residential property will be subject to CGT. Only gains from April 2015 will be subject to tax so residential property owners will be able to use the market value of the property as at April 2015 as their base cost for calculating the gain. 

The new rules apply to all non-resident individuals, non-resident trustees, non-resident companies and the personal representatives of a deceased non-UK resident. Non-residents in partnership will also be subject to the new rules to the extent they are entitled to the gain on disposal.

Rate of tax

Companies will be charged CGT at the UK corporation tax rate (20% from 1 April 2015). Individuals will be charged at 18% or 28% depending on the amount of the gain and their other UK taxable income. We understand that trustees will be taxed at the trust rate of 28%. 

Reliefs and exemptions

The following will be excluded from the new CGT rules:

  • communal residential property, such as boarding schools and nursing homes;
  • UK REITS;
  • UK residential property held by diverse institutional investors;
  • purpose built student accommodation consisting of at least 15 bedrooms and occupied more than 50% of the tax year by students;
  • accommodation excluded from registration under the Housing Act 2004 (houses in multiple occupation) being controlled or managed by higher or further education establishments. 

Non-UK residents will also have access to the same reliefs and exemptions available to UK residents, such as the annual exemption (currently £11,000). 

Principal Private Residence Relief ('PPR') will also be available to non-UK residents, but only if the non-UK resident or their spouse or civil partner is resident in the property for at least 90 days during the tax year. If PPR is available then no CGT would be due on any gains. This could have implications for non-UK residents who need to spend fewer than 90 days in the UK in order to remain non-UK resident.  

Interaction with ATED

From April 2013 CGT was imposed on the sale of residential property by non-UK resident companies which fell within the Annual Tax on Enveloped Dwellings ('ATED'). The ATED rules were designed to limit the benefit of holding UK residential property through a corporate structure (known as 'enveloping'). Companies and other "non-natural persons" are subject to ATED if they own UK residential property which has a market value above £1 million. This will be extended to properties with a market value above £500,000 from 1 April 2016. The ATED charge increases depending on the value of the property as set out below.

Click here to view table.

There are a number of exemptions and reliefs from ATED.  These include reliefs in relation to property rental businesses, property developers, property traders and financial institutions which acquire dwellings in the course of lending.

All companies and other "non-natural persons" that own UK property and are subject to ATED are also subject to ATED CGT on any gains arising from 1 April 2013 at 28%. Companies and other entities subject to ATED will continue paying the ATED CGT charge even where liable under the new rules. The ATED CGT charge will take priority over the new CGT rules thereby preventing gains being taxed twice. 

Changes proposed in the Summer Budget 2015 

Under the current rules, where a foreign owner holds UK residential property directly this is subject to inheritance tax (IHT) at 40%, subject to the usual reliefs. However, if the property is held through an offshore company, there is no IHT charged on death. This means that, despite the ATED rules outlined above, for some individuals there could still be a significant tax incentive to keep property "enveloped".

To counteract this, the government wants to remove the IHT advantages of holding UK residential property in this way.  The government has announced its intention to bring in legislation so that from April 2017 foreign owners or offshore trusts owning UK residential property through an offshore company, partnership or other opaque vehicle will pay IHT on the value of that property where a chargeable event occurs.  The IHT charge will be based on the ATED rules, but the full details have not yet been finalised. The government has said it will consult on the details of these proposals at the end of this summer. It is envisaged that legislation will be included in the Finance Bill 2017 and that any changes will be effective from 6 April 2017.