In anticipation of the inheritance tax changes, which the Government has confirmed will come into force in April 2017, many individuals and advisers are looking at bringing UK residential property holding structures to an end.
The reason for getting UK residential property out of such structures (de-enveloping) is that corporate structures will no longer provide any inheritance tax protection for UK residential property once the changes come into force. This could leave clients in a "worst of all worlds" situation where:
- the company is liable to the annual tax on enveloped dwellings ("ATED") on a yearly basis
- the trustees of any trust holding the company's shares are liable to the inheritance tax ten year anniversary and exit charges on the residential property value
- the value of the property is included in the settlor's estate for IHT purposes on their death due to the gift with reservation of benefit provisions.
This article focuses on some common questions about ATED-related CGT ("ATED CGT") and Non-Resident CGT ("NRCGT") which may be relevant to anyone de-enveloping such structures in the coming months.
1. To whom do these taxes apply?
ATED CGT will apply to any person who makes a disposal of UK residential property which has, during its ownership, been subject to the ATED charge.
The most common scenario where ATED CGT will apply is to an offshore company disposing of a property valued over £500,000 in April 2012 which has been held for personal use. It is worth noting that ATED CGT also applies to UK companies and if it applies it takes preference over UK corporation tax.
NRCGT applies much more widely than ATED CGT and applies to all non-resident persons (individuals, corporations, trustees etc.) on the disposal of UK residential property.
2. What is taxed?
The ATED CGT charge applies to any post April 2013 gains to the extent that the ATED regime applied to the holding of the property during this period (i.e. ATED applied with no relief).
NRCGT applies to any gain which accrues after 5 April 2015 to a non-resident person.
3. What are the rates of tax?
ATED CGT is charged at a flat rate of 28% – there are no allowances available to reduce the gain (ie no indexation allowance and no annual exempt amount).
NRCGT is charged at the rates which would be charged if the non-resident person was UK resident. This means that for the current tax year:
- Individuals have an annual exempt amount of £11,100 to reduce the gains subject to tax. The tax rate will be 18% or 28% depending on which band the gains fall into. If a non-resident individual and their spouse/civil partner have occupied the property between them for at least 90 nights in each tax year then they may be entitled to tax relief (principal private residence relief) on the gain.
- Trustees have an annual exempt amount of up to £5,550 to reduce the gains subject to tax. The remainder of the gain will be charged to tax at a flat rate of 28% unless a beneficiary has occupied the property as their main residence so that they can jointly elect with the trustees for principal private residence relief to apply to the gain.
- Companies are liable to NRCGT at a rate of 20% but subject to limited indexation allowance to allow for the effect of inflation on the acquisition costs to be taken into account.
4. Can both taxes apply at the same time?
Yes. However, if both taxes apply at the same time (for instance because a non-resident company is disposing of a property which has been subject to ATED after 5 April 2015) then the ATED CGT charge takes precedence over the NRCGT charge. However, an NRCGT return should still be submitted even if no tax is due.
Another common situation arises where the property being disposed of has been subject to both ATED CGT and NRCGT at different times. For instance, if a property is held by a non-resident company and was worth between £500,000 and £1,000,000 on 1 April 2012 then it would only have come within the ATED regime on 6 April 2016. If no ATED relief applies then the gain on the disposal from 6 April 2016 will be subject to ATED CGT. However, the gain from 6 April 2015 to 5 April 2016 will instead be subject to NRCGT. The company will need to pay both ATED CGT and NRCGT on this disposal, but these taxes apply to gains arising during different periods.
5. Are there any choices when calculating the gains?
Yes. The choices are slightly different for each of ATED CGT and NRCGT as follows:
For ATED CGT there are two choices available to the taxpayer when calculating the gain on the property:
1. The default basis:
- if the property was owned prior to ATED applying then it is re-valued as at the date on which the property came within ATED (ie 5 April 2013, 5 April 2015 or 5 April 2016)
- the gain in value from that date to the date of disposal is then ascertained
- a relevant fraction of that gain is subjected to ATED CGT on the basis of the number of days during the ATED ownership period when the property was not relieved from ATED. The remainder would be subject to NRCGT if it related to a post 5 April 2015 period.
2.The retrospective basis:
Alternatively, the taxpayer may make an election in the ATED CGT return for the whole of the gain (from the date of acquisition) to be subject to ATED CGT.
This may be preferable where the property was acquired shortly before it became subject to ATED as using this calculation method will allow acquisition costs (i.e. SDLT) to be deducted. This method may also be preferable where substantial works were undertaken on the property shortly before it became subject to ATED CGT as the election will allow these costs to be taken into account when calculating the gain.
For NRCGT there are three options for calculating the gain:
1. The default basis:
The default position is that the property is re-valued as at 5 April 2015 and the gain from that date to the date of disposal is then ascertained.
If a property was acquired by a non-resident after 5 April 2015 then the whole gain during ownership is potentially subject to NRCGT.
2. The retrospective basis:
The taxpayer may make an election in the NRCGT return for the whole of the gain (from the date of acquisition) to be made subject to NRCGT.
This may be preferable where the property was acquired shortly before 5 April 2015 as using this calculation method will allow acquisition costs (i.e. SDLT) to be deducted. This method may also be preferable where substantial works were undertaken on the property shortly before 5 April 2015 as the election will allow these costs to be taken into account when calculating the gain.
3. The time apportionment basis:
Alternatively, the taxpayer can elect for a straight-line time apportionment method to apply when calculating the gain (ie where the property was owned prior to 5 April 2015 the gain can be calculated for the whole period of ownership and then simply time apportioned to include only the percentage of the gain attributable to the post 5 April 2015 ownership period).
If the gain is subject to both ATED CGT and NRCGT then the same basis (ie default or retrospective) must apply to both. The straight-line time apportionment method cannot be used in this instance.
6. When are the returns due?
The filing deadline for ATED CGT returns is aligned with the usual filing deadline for self-assessment. As a result, the filing deadline (assuming online filing) is by 31 January following the end of the tax year during which the disposal took place. In practice many ATED CGT returns are submitted well before that deadline as the company is often liquidated shortly after the property is transferred out.
NRCGT returns need to be filed within 30 days of the conveyance, which is broadly the same deadline which applies for SDLT returns. A nil NRCGT return should be filed within this deadline even if there is no tax to pay (for instance because the entire gain is subject to ATED CGT).
Changes which came into force in the Finance Act 2016 with retrospective effect mean that there is now no requirement to file a NRCGT return for disposals to which a statutory no-gain/no-loss provision applies. The most common example of a statutory no-gain/no-loss is on a gift between spouses. However, for the avoidance of doubt, even after the Finance Act 2016 changes a return still needs to be filed if a no-gain/no-loss disposal occurs simply because the property has not changed value during the relevant period.
7. When is the tax due?
The payment deadline for ATED CGT returns is aligned with the usual payment deadline for self-assessment so the tax is payable by 31 January following the end of the tax year.
If NRCGT is payable then the default position is that this tax should be paid within 30 days of filing the return.
However, if the taxpayer has an existing relationship with HMRC (ie they file a self-assessment return or ATED return) then an election can be made in the NRCGT return for the payment to be deferred until the taxpayer's normal payment date for the tax year (ie 31 January following the end of the tax year).