Summary

HMRC have announced that the new capital gains tax (“CGT”) charge on non-residents disposing of UK residential property, due to come into effect in April 2015, will not extend to institutional investors and companies with diverse ownership.

Background

In the Autumn Statement last year, the Chancellor announced the new CGT charge for non-resident investors in UK residential property (see our previous Law-Now“Autumn winds blow cold for non residents"). In March of this year, HMRC issued a consultation paper entitled “Implementing a capital gains tax charge on non-residents” to consult on different aspects of the new CGT charge on gains made by non-residents disposing of UK residential property from April 2015.

Under current law and unlike other countries that collect tax on gains relating to the disposals of residential property located within their jurisdiction, the UK does not generally charge CGT on disposals by non-residents. UK resident individuals are subject to CGT on disposals of any residential property that is not their primary residence, including gains on any residential property they own abroad. Residential property owned through trusts, companies and funds outside the UK is not usually subject to CGT or corporation tax in the UK.  The new CGT charge is being introduced to align the position of UK residents and non-UK residents.

Initially, HMRC intended that the new charge would apply to any non-residents disposing of UK residential property, except for charities and pension funds equivalent to those which are tax exempt in the UK. Respondents to the consultation urged that such a blanket charge would limit overseas institutional investment in the UK, particularly in the private rented sector which would adversely affect housing supply.

The Treasury has now announced that ‘widely held’ investors or companies will not be subject to the proposed extension of CGT to non-UK residents.  Instead they intend to set the scope of the tax on corporate investors and other collectives by reference to a form of “close company” test drawing on existing legislative definitions.

Conclusion

It is our view that this is a positive and proactive step by the Government in relation to the ambit of the new CGT charge. The consultation closed on 20 June 2014 and the Government stated that a full response on the consultation will be published in the autumn. However, this swift announcement by the Government will go a long way to allay fears previously held by institutional investors as a result of the consultation and restore investor confidence and stability in the sector.

Now the Government need to turn their hand to dealing with the other issues highlighted by the responses to the consultation in relation to Principal Private Residence and the Annual Tax on Enveloped Dwellings.