From 6 April 2015, Capital Gains Tax (CGT) will be extended to non-UK residents selling UK residential property. This is the latest step in a series of significant changes affecting the taxation of UK residential property in recent years.
How will the charge be calculated?
Only gains made from 6 April 2015 are taxable in calculating the gain on property disposal i.e. non-UK resident property owners will substitute the value of the property as at 6 April 2015 for its actual acquisition cost, thereby rebasing the value to its market value as at that date. Alternatively, property owners may elect to calculate the gain by using the actual acquisition cost, but paying tax only on the time-apportioned post-5 April 2015 part of the gain.
On an eventual disposal of the property, a professional valuation will provide evidence to calculate the gain and determine which basis of calculation will produce the lowest tax charge.
UK’s HM Revenue & Customs (“HMRC”) have issued brief general guidance.
Depending on the type of property, it may be sufficient to obtain more than one valuation from local estate agents. However, we recommend that the valuation as at 6 April 2015 be obtained from a professional surveyor.
The valuation should ideally be obtained on or near to 6 April 2015 (rather than being obtained later on when the property comes to be sold for example). This will provide the best evidence of the property’s market value at that time and thus greater certainty for the taxpayer. Alternatively, an “historic” 6 April 2015 valuation could be obtained at the time of a future sale but this may be less secure as HMRC might well challenge any valuation which they consider to be unrealistic
It is sensible to record (in April 2015) the overall condition of the property and any unusual features – this will help establish later on the value as at April 2015.
For individuals the rate of tax on any gains made will be 18% or 28% depending on the individual’s UK income and the amount of any gain on disposal of the property. Non-resident individuals will be entitled to the same annual exemption as UK residents i.e. £11,100 in 2015/16. Assuming the non-UK resident has no taxable UK income, then gains in excess of approximately £50,000 on disposal of UK residential property in a tax year will fall within the 28% CGT charge.
Offshore companies will pay the new tax at the corporation tax rate for UK companies (20% from April 2015) with an indexation allowance for inflation, unless the property being sold has been subject to the Annual Tax on Enveloped Dwellings (ATED) charge, in which case some or all of the gain may be taxed at 28% going back to 6 April 2013 subject to further adjustments in certain circumstances. Non-resident trustees will pay the new tax at the rate of 28%. Specific advice should be taken by any trustees planning to sell UK properties as the tax rules are highly complex.
The scope of the new charge
The new regime affects non-UK resident individuals, trustees, closely-held companies and partners in partnerships disposing of a UK residential property interest.
To avoid discouraging institutional investment in UK residential property, the legislation will limit the scope of the extended charge to companies which are used as the private investment vehicle of individuals, families or small groups of investors. The definition of a “residential property interest” is wide and includes property of any value which is suitable for use as a dwelling (or is being constructed or adapted for use as a dwelling). The charge will also be triggered by the assignment of rights to acquire a UK residential property, such as the sale of a purchase contract for a property in a new development. Thus, so-called “flipping” of contracts by non-UK residents will be potentially taxable.
Principal Private resident relief
Principal private residence relief from CGT will be available to non-resident individuals (and non-resident trustees where a beneficiary meets the qualifying conditions for an individual) but only for tax years in which the individual or their spouse have spent at least 90 midnights in the property. UK residents intending to move abroad should also note possible restrictions on principal private residence relief and should seek advice in appropriate cases.
Mechanism for reporting and paying tax
Individuals and companies will need to report relevant disposals to the UK’s HM Revenue and Customs within 30 days (regardless of whether a gain has been realised). Where there is an existing relationship with HMRC they may pay the tax due as part of their self-assessment return, otherwise payment must be made within 30 days of the disposal.
A return to HMRC will usually be required even in cases where there is no chargeable gain, for example, because the gain is within the CGT annual exempt amount.
Summary of practical issues
- When the property is sold, it is the value as at 6 April 2015 as well as the sale price which will be required by HMRC to calculate the tax.
- It is advisable for property owners to seek a professional valuation of their property by 6 April 2015 as contemporaneous evidence to support the figure they use as the rebased value on an eventual disposal.