The government has published a response to its consultation on extending capital gains tax (CGT) to non UK residents on disposals of UK residential property. The response confirms that non-residents will pay CGT on UK residential property disposals from 5 April 2015 onwards. This blog post explains the changes below.
The current rules
Under the current charging regime, CGT applies only to UK resident taxpayers. Non-residents are therefore able to realise gains on the sale of UK assets without a CGT charge. The only exception has been for those who are only temporarily non-UK resident and certain non-UK entities, such as companies, covered by the “Annual Tax on Enveloped Dwellings” (“ATED”) regime.
This anomaly in the CGT regime has caused particular controversy in relation to sales of UK residential property. In essence, non-residents have been able to capitalise on the increase in the value of UK residential property without paying CGT. In contrast, UK resident taxpayers, unless covered by principal private residence relief (“PPR relief”) – which exempts gains on a taxpayer’s main residence – are charged CGT at 18% or 28% on equivalent disposals of residential property.
The new rules
For gains arising after 5 April 2015, the government will extend CGT to non-residents on the disposal of UK residential property.
What is “residential property”?
The new charge will only affect UK “residential property”. This will cover property that has the potential to be used as a dwelling and property that is in the process of being constructed or adapted for use as a dwelling. It follows that some types of commercial property may be caught by the new charge. However, other types of property, such as care homes, will be expressly excluded.
Who will be affected?
The charge will be extended to:
- Non UK resident individuals;
- Non UK resident trustees;
- Non UK resident partners in partnerships;
- Personal representatives where the deceased was non UK resident; and
- Certain types of non-resident companies.
The intention is that institutional investors, such as pension funds, should not be caught by the new charge. The government intends to achieve this through the introduction of a “genuine diversity of ownership” test (the “GDO test”) and a “narrowly controlled company” test. In essence, this should mean that the new charge will not apply to either:
- Non UK resident companies which cannot be controlled by five or fewer individuals (or companies that are not themselves narrowly controlled); or
- “Collective investment schemes”, such as pension funds, that meet the GDO test.
It is common for companies to own property in the UK through several corporate layers. Whilst the exact details are not yet available, there is a concern that the tests might not be sophisticated enough to look through such layers to determine the identity of an ultimate investor to see whether relief should be afforded to the overall corporate structure.
What are the proposed rates of tax?
- Non UK resident individuals will pay CGT at 18% or 28% depending on their level of income and the size of their gain.
- Non UK resident trustees will pay CGT at 28%.
- Non UK resident companies will pay CGT at 20%, to the extent that the gains are not “ATED-related”. Non UK resident companies will benefit from indexation relief.
- Non UK resident individuals and trustees will be afforded the same annual exemption (for tax year 2014/15 £11,000 for individuals and £5,500 for trustees) as is available for UK resident taxpayers.
From when will gains be calculated?
The charge will come into effect from 6 April 2015 and apply only to gains arising after that date.
In calculating the charge, the default position will be for property values to be rebased to market values as at 6 April 2015. However, the taxpayer will be given the option to either:
- “Time apportion” the whole gain over the period of ownership; or
- Calculate the gain (or loss) over the whole period of ownership in the usual manner.
Will non UK residents be able to offset gains against losses?
Loses on disposals of UK residential property will be ring-fenced for use against gains on the disposals of other residential property. The taxpayer will be allowed to carry forward any unused losses.
How will the tax be collected?
The government is still finalising how the tax will be collected. However, all non UK residents will be required to notify HMRC of any disposal within 30 days of completion of the sale of the UK residential property.
Will PPR relief still be available?
Broadly speaking, PPR relief will continue to available. However, the government is planning to introduce changes to the rules determining when a UK property can benefit from PPR relief.
Under the current rules, PPR relief eliminates a CGT charge which might have otherwise applied on the disposal of an individual’s only or main residence. Broadly speaking, the relief is available where an individual disposes of a private dwelling house (or part of a dwelling house), which has been their only or main residence throughout the period of ownership, and was not acquired for the purpose of realising a gain on disposal. Under the current system, a taxpayer with more than one residence can choose, by means of an ‘election’, for any given period, which of those properties they would like to qualify for PPR relief.
Under the new regime, PPR relief will only be available (as determined on an annual basis) if:
- The individual making the disposal was tax resident in the same country as the property for that tax year; or
- The individual meets a new “90 day rule”.
To meet the "90 day rule", the individual must have spent at least 90 midnights in the property in the tax year for which the PPR relief is claimed. Where an individual owns more than one property in an overseas jurisdiction, the 90 day rule will apply across all of those properties.
Accordingly, non UK residents who spend 90 nights a year or more in the UK will still be able to sell their property from 6 April 2015 onwards free of CGT. However, such individuals will need to be careful that they do not become UK resident for general tax purposes. In particular, such individuals will need to bear in mind the “Statutory Residence Test”, in effect from April 2013 onwards, which determines an individual’s status based on time spent in the UK as well as “sufficient ties” (one of which is a 90 day test).
Of course, UK resident taxpayers will also be affected by the amended PPR relief rules. Where a UK resident claims an offshore property as their main residence, they will now have to spend at least 90 nights in the property for that tax year to count towards the exempt period. This could affect the individual’s tax residence status in that non UK jurisdiction.
The new rules are, in some respects, less punitive than some had feared. At one stage, for example, the government was contemplating whether to remove the ability of any individual (whether UK resident or non UK resident) to make an election for the purposes of PPR relief.
The new rules also represent a shift in the government’s approach towards the offshore corporate ownership of UK residential property. Until relatively recently, the government had sought to discourage acquisitions of UK residential property through offshore corporate “envelopes”. Budget 2012 sought to give effect to this aim by introducing new rules on ownership of residential property by non UK resident non-natural persons, including a 15% rate of stamp duty land tax (“SDLT”) on such purchases where the consideration exceeded £2 million (now £500,000) and the Annual Taxation of Enveloped Dwellings (“ATED”) regime.
From April 2013, ATED-related CGT has applied at a rate of 28% to disposals of high value residential property by resident and non-resident non-natural persons.
Under the new CGT regime, to the extent a gain is ATED-related, then the ATED-related CGT will remain at 28% on disposals of property. To avoid double taxation, where part of the gain could be subject to both ATED-related CGT and the new CGT charge, then the ATED-related CGT charge will take priority.
The new rules are likely to make the use of offshore companies more attractive again as it will put non UK resident individuals holding UK residential property in a similar position to non UK resident companies from a CGT perspective. Although owning property in this way may incur the ATED charge, the corporate envelope will shield the property from inheritance tax (“IHT”) if the owner is not domiciled or deemed domiciled in the UK for IHT purposes. In contrast, subject to any available relief or exemption, where an owner holds UK residential property directly, regardless of whether they are domiciled or deemed domiciled in the UK for IHT purposes, then the owner will pay IHT at 40% on the total value of any property above the nil-rate band threshold.