Over the past few months a number of changes have been made to the tax regime for buying and selling residential property in the UK. This article summarises the latest position.
Non-residents Capital Gains Tax (“NRCGT”) rules (Finance Act 2015)
These rules took effect from 6 April 2015. Subject to certain exemptions, all non-residents will be subject to UK CGT on gains arising post 5 April 2015 on the disposal of UK residential property. Broadly, the basic starting point is that residential properties are rebased, for NRCGT purposes, to their market value as at 5 April 2015.
The rates of tax that will apply are:
- Companies: 20% (that are not exempt companies)
- Individuals: 18% or 28% (depending on whether the individual is a basic or higher rate tax payer)
- Trustees and personal representatives: 28%
The main entities which are either exempt or can claim an exemption are: charities; certain investment trusts and venture capital trusts; registered pension schemes; diversely- held companies; certain unit trusts and open- ended investment companies (or “OEICs”); certain schemes which have or include investors which are offshore funds, OEICs or authorised unit trusts; and companies that deal with life assurance. Reliefs may also be available, such as principal private residence relief for individuals or indexation relief for non-resident companies.
The government also announced certain changes to the NRCGT rules at the Autumn Statement 2015, including an amendment to prevent double taxation in certain instances.
Restriction on interest deductions on purchases of buy-to-let properties (Finance (No. 2) Act 2015)
On 8 July 2015 the government announced a new measure which restricts relief for finance costs on let residential properties. It is being introduced gradually from 6 April 2017. The new rules operate by requiring, in the first instance, that profits are computed without regard to the relevant interest payments. A separate relief, a “tax reduction”, is then calculated by reference to basic rate tax on an amount equal to the interest payments, for which relief has now been denied.
“Finance Costs” include: mortgage interest, sums which are equivalent to interest and the incidental costs of obtaining finance by means of the loan, for example, the fees incurred when taking out or repaying mortgages or loans. The current deduction for higher rate tax relief on finance costs will be restricted in the following way:
- In the tax year for 2017 to 2018 the deduction from property income (as was previously allowed) will be restricted to 75% of finance costs, with the remaining 25% being available as a basic rate reduction
- In the tax year for 2018 to 2019 this will be reduced to 50% of finance costs and 50% will be given as a basic rate reduction
- In the tax year for 2019 to 2020 this will be reduced to 25% of finance costs and 75% will be given as a basic rate reduction
- In the tax year for 2020 to 2021 no deduction for higher rate tax relief on finance costs will be available and all financing costs incurred by a landlord will be given as a basic rate reduction
Commercial letting of furnished holiday accommodation is excluded.
Proposed changes concerning foreign domiciled persons owning (directly or indirectly) UK real estate (Summer Budget 2015)
The Government announced on 8 July 2015 that, from April 2017, it intends to bring all UK residential property held directly or indirectly by foreign domiciled persons into charge for Inheritance Tax (“IHT”) purposes, even when the property is owned through an indirect structure such as an offshore company or partnership. This could, therefore, result in foreign domiciled persons being liable to pay a 40% tax liability in respect of the market value of UK residential properties held (directly or indirectly) by them on their death.
These changes are due to be included in the 2017 Finance Bill and a consultation document will be published in due course. It is anticipated that draft legislation will be included in the Finance Bill 2017. Further announcements may be made in the 2016 Budget, on 16 March 2016.
Proposed new additional 3% Stamp Duty Land Tax (“SDLT”) charge on purchases of second homes (Autumn Statement and Spending Review 2015)
The proposed new rates will be 3% above the current SDLT rates and will apply to purchases of second homes, for example, buy to let properties, from 1 April 2016. It is currently anticipated that the higher rates will not apply to: purchases below GBP 40,000, caravans, mobile homes, houseboats, or funds making significant investment in residential property, although the test for what constitutes a significant investment in residential property has not yet been finalised.
It is proposed that the higher rates will apply to all contracts entered into after 25 November 2015, where completion takes place on or after 1 April 2016.
Under proposed transitional rules the higher rates will not apply to contracts which were exchanged on or before 25 November 2015 but not completed until on or after 1 April 2016.
The Government is currently consulting on the policy detail, including the way in which joint purchasers should be treated, the impact on those who only temporarily own two properties, the scope of any exemptions and compliance issues arising from the new regime. Confirmation of the final design of the new rules will be announced at the Budget on 16 March 2016.