The Chancellor announced in his Autumn Statement that he will consult next year on a proposed capital gains tax for non resident investors in UK residential property. The tax is intended to have effect from April 2015. This is a further extension of the scope of UK tax - and is intended to be in addition to the CGT regime for 'enveloped' dwellings within ATED [see our previous commentary on ATED - "The ATED Return - What to Expect?"] which came in earlier this year. Unlike that regime, it seems the new tax will apply to residential property let to third parties so is firmly intended to tax investment gains, but will have come as an unwelcome surprise to investors who recently restructured to avoid the ATED regime. Anyone non resident who has property within ATED and intends to occupy it themselves in the future might revisit restructuring opportunities now they know personal gains will not be taxed until 2015.
A number of technical issues will be raised by this change and there will be plenty for the Treasury to consider in the course of the consultation.
- whether the principal private residence exemption will apply in the same way as it does to resident taxpayers - under EU law at least EU buyers will be entitled not to be discriminated against and reading between the lines it does seem that the relief is to extend to non residents (the reduction in the three year final period to eighteen months for this relief perhaps prefigures this intention). However, will the property still be able to be elected to be the 'main' residence of a non resident - who is likely to have other homes outside the UK?
- what mechanism will be put in place to collect the tax from non residents who might otherwise have no contact with HMRC - some form of registration process or tax ID scheme perhaps? The annual return for the ATED puts HMRC on notice of taxpayers who might be liable for the special CGT charge, so something similar might be sought here. In extremis the tax could be imposed as a withholding tax from sale proceeds but how would other forms of disposal be caught?
- should a level playing field be sought with non resident trader developers whose profits might be free of UK tax under a conventional CGT regime?
- how does it knit with the ATED regime and which will take precedence where a non resident company owns residential property which is not exempt?
Assuming, as seems probable, that values are rebased to April 2015 so as to catch future rather than latent gains and that the rate is set as with ATED at a flat 28%, it seems unlikely to have a significant cooling effect on London's booming residential property market either in the short or longer term, but upmarket housebuilders will be concerned that this is an attack on their very successful promotion of UK residential property as a safe haven for the world's private wealth. At first glance the modest revenue forecast from this tax looks like an underestimate.