The Government has announced that the coming year will see further significant changes to the taxation of UK residential property affecting all non-UK residents and all UK residents who use more than one residential property.
- In a move which also affects UK residents, from April 2015 occupiers of more than one home will no longer be able to choose which home benefits from Principal Private Residence (PPR) relief (which can give 100% relief from capital gains tax (CGT) for individuals). Only the actual main home will be eligible for relief. This adds to a restriction to be introduced with effect from April 2014 which reduces a period during which a property could not be used as a home while still qualifying for relief from three years to eighteen months.
- Extensions to the 15% rate of Stamp Duty Land Tax (SDLT) and the Annual Tax on Enveloped Dwellings (ATED), taxes which affect corporate owners of residential property, coming into effect respectively from 20 March 2014 and April 2015.
- It appears that from April 2015 all non-UK residents will be required to pay CGT on the sale of UK residential property.
Changes to Principal Private Residence Relief
What is the relief?
Relief from CGT on an individual's main place of residence is a welcome tax relief, and under current rules any property that is a person's private residence is may be relieved from CGT. Whilst it is not possible to obtain complete relief on more than one property at a time, relief is available on a second home for the last three years of ownership, provided that this property was used as a primary place of residence at some point in the past. For instance, if a home was bought ten years ago and used as a primary place of residence until five years ago, the owner would receive CGT relief on 8/10th of any gain, that is the five years it was used as a primary residence in addition to the three years exemption.
What has changed already?
From 6 April 2014, an individual's 'final period exemption' which applies to a property that has been a person's private residence at some point in the past, has been halved from three years to eighteen months. This reduced exemption period will mean that anyone selling a second home (which has previously been their private residence) will face a higher tax bill. By way of the example above, under the circumstances the owner would only receive PPR relief on 6.5/10th of the gain, because the exemption period is now 18 months shorter. Those who have turned their former homes into buy-to-let investments or a holiday home or pied-a-terre, or who are forced to sell assets as a result of a divorce could be affected by this reduction.
What else will change?
It is also proposed that from April 2015, those who occupy more than one property will no longer be able to make a choice between which one benefits from PPR relief. The main residence would instead be determined as a question of fact or by reference to a fixed rule (such as where the person has been present for the majority of his time in the tax year).
What should you do?
If you are an individual who owns more than one residential property including at least one in the UK, you should take advice on how this may affect your CGT position and whether any changes should be made ahead of the rule change. You may have made strategic PPR elections which will need to be reviewed for their effectiveness and/or reconsidered.
Extension of 15% SDLT and ATED (and interaction with new CGT charge – see below)
What is the current position?
If residential property worth over £2 million is owned by a non-UK company, the company is required to pay the ATED, a yearly charge levied by reference to the value of the property.
At the same time as introducing ATED, non-UK companies caught by this rule were also subjected to a new CGT charge on any gain made from 6 April 2013 on a sale of the property.
Also, a new rate of SDLT of 15% was introduced for the acquisition by companies of residential property worth more than £2m.
With effect from 20 March 2014, the 15% rate of SDLT applies to acquisitions by companies of residential properties worth above £500,000.
What other changes will there be?
The ATED and the ATED related capital gains tax charge are being extended so that so that from 1 April 2015 both charges will apply to properties worth over £1 million and up to £2 million and from 1 April 2016 both charges will apply to properties worth over £500,000 up to £1 million. The ATED charge will be £7,000 in the higher of these two new bands and £3,500 in the lower and will increase by CPI each year.
Introduction of CGT for all non-UK residents
Who will be caught by the new CGT charge?
All non-UK residents, including individuals, companies and trustees.
Does this only affect high value properties?
No, the proposal is that the CGT charge is extended to all non-UK residents who make a gain on a sale of residential property regardless of the value of the property (similarly, if a loss is generated, this will be an allowable loss). This contrasts with the raft of tax changes introduced in April 2013, which only affected properties worth more than £2m.
Are there any exceptions or reliefs available?
Up to now, PPR relief may have assisted non-UK resident individuals with this new CGT charge if they had elected for their UK residential property to be treated as their main home for the purposes of that relief. However, without the ability to elect, it seems unlikely that the UK property would be the actual main home of a non-UK resident.
Some residential property used for communal purposes will be excluded (e.g. halls of residence or care homes).
There will be no relief for property which is let on a commercial basis (again this contrasts with the charges introduced in April 2013). This means that whereas previously a non-UK company may have escaped the ATED (and ATED related CGT charge) because the property was let, that non-UK company would now be required to pay CGT on a sale.
I have held my UK property for years and the potential gain is significant. Will I be taxed on the whole amount?
It is likely that the value of properties will be treated as rebased in April 2015 so that CGT would only be payable on any gains which accrue after that date.
How do the ATED CGT charge and the new CGT on non-residents interact?
Non-UK companies which are within the ATED rules will only be subject to the ATED related CGT charge. All other non-UK companies will be caught by the new CGT charge discussed above.