Consultation on the extension of CGT to non-residents

The Chancellor announced in the Autumn Statement (in December 2013) that the Government wanted to extend Capital Gains Tax (CGT) to the disposal of UK residential property by non-residents from April 2015, with the aims of fairness, simplicity, and presumably increased revenue. HMRC has now published its consultation on the implementation of this proposal.

The consultation proposes a wide definition of ‘residential property’. In particular it includes:

  • Properties bought as rental investments;
  • Properties that are in the process of being constructed or adapted for residential use; and
  • Disposals of multiple dwellings in a single transaction (treated as a non-residential transaction for SDLT purposes).

Properties used for communal use (such as boarding schools and halls of residence for students,as well as, nursing homes) will be excluded from the CGT regime.

It is notable that HMRC does not propose to apply the same exemption as currently applies with respect to rental properties falling within the scope of ATED to the proposed extension of CGT and has acknowledged its differing approaches.

The consultation proposes a wide definition of ‘non-residents’. In particular it includes:

  • Individuals;
  • Partnerships (to the extent that the gain is attributable to a non-resident partner);
  • Trustees; and
  • Companies. HMRC proposes that the extension of CGT will operate in conjunction with the ATED CGT charge, such that companies that are not ‘genuine businesses’ will be subject to the ATED-related CGT charge and ‘other’ companies will be subject to a ‘tailored’ charge, details of which have yet to be published and will be subject to the results of the consultation. The interaction between the two different regimes will undoubtedly give rise to complexity and confusion but, either way, it appears that HMRC intends that rental properties will fall within the CGT regime.

The rates of tax are intended to mirror those of UK residents, with the same higher and lower rates and the same annual exemption.

HMRC’s suggested delivery mechanism is a withholding tax on the disposal of the property. The seller’s solicitors/accountants would have the task of identifying their client’s tax residence, and paying the tax on a similar timescale to SDLT.

Abolition of PPR election

As part of the consultation on the extension of the CGT regime to non-residents, HMRC is also consulting on the abolition of the election for PPR to apply in relation to UK residential properties for both non-residents and UK residents alike. HMRC is concerned that non-residents could claim PPR against their (usually sole) UK residence even when they spend little time there, largely negating the purpose of the tax. They therefore propose to abolish free election, replacing it with a more factual basis for the choice of property. It is surprising that this significant proposed change to domestic taxation has been tucked away in the detail of a consultation discussing the taxation of non-residents.

The consultation invites responses as to a replacement method of identifying which property is 'principal'. The two current suggested approaches to identifying the principal residence are as follows:

  • A consideration of all the evidence, including factors such as delivery of post, the electoral roll, where the family lives, etc; or
  • A fixed rule based on residence, eg, where the person has been present the most in any given tax year.

Responses to the consultation are due by 20 June 2014 and we shall continue to keep you updated on this area of uncertainty.