A key attraction for wealthy foreign investors in the UK has been their ability to benefit from the UK's capital gains tax ("CGT") not being applicable to them when they sell UK residential property which they hold as an investment.  This attraction was eroded by the introduction in April 2013 of the Annual Tax on Enveloped Dwellings ("ATED") which, in broad terms, applies to residential property held by non-UK resident companies where the property is effectively not used for commercial purposes (such as letting to a third party or for property development).  However, as announced in the 2013 Autumn Statement, the CGT regime will be extended to apply to gains made by non-UK residents holding UK residential property from April 2015.

This year, the Government went through a consultation process to refine the scope of the extension to the CGT rules which has culminated in the publication, on 27 November 2014, of the Summary of Responses document on the implementation of the CGT charge for non-residents.  This document sets out how the extended CGT charge is to operate.

> To read the Summary of Responses click here 

Key features include:

  • only gains on UK residential property made after April 2015 will be taxable.  There will be no need to restructure holdings to achieve this as the Government will allow the market value at April 2015 to be used as the basis in the property when calculating the gain;
  • the CGT charge will be applied at the UK corporation tax rate for companies (20% from April 2015) and will be applied at the individual CGT rate for individuals (being 18% or 28% depending on the amount of the gain and other UK income of the individual);
  • non-residents holding their residential property through companies could, on a sale of those properties after April 2015, be subject to both ATED-related CGT charges and the CGT charge (depending on the use of the property), although where both would apply to the same gain, the ATED-related CGT charge at 28% will apply in priority;
  • the annual exemption and various other reliefs available to UK residents will generally also be available to non-UK residents. In this context, principal private residence exemption will be available to non-residents but either they or their spouse or civil partner must reside in the property for at least 90 days in a tax year; and
  • the transaction and the CGT applicable will need to be reported (and could be payable) to HM Revenue and Customs ("HMRC") within 30 days of the transaction involving the disposal of the property.

The draft legislation to implement the changes will be published on 10 December 2014.

Why are the changes being introduced?

The intention behind the extension of the CGT regime to non-residents is to remove the difference in treatment between UK and non-UK residents who sell their UK residential property, as UK residents are currently subject to CGT unless they can benefit from principal private residence ("PPR") exemption. The rules apply to residential property only, which is defined as property suitable for use as a dwelling and includes property in the process of being constructed or adapted for such use. The definition is to include off-plan purchases where the residential building is under construction.

Exclusions from the CGT charge

Excluded from the charge to CGT will be communal residential property such as boarding schools and nursing homes as well as disposals by UK REITs (and non-UK REITs where they are equivalent to UK REITs). Also excluded from the scope of the CGT charge are disposals of UK residential property made by a non-UK resident company with diversely held institutional investors, in order to support the development and supply of housing in the UK.

In response to the many requests of respondents to the consultation, the Government has also accepted that the exemption from CGT for student accommodation in the form of halls of residence should also be extended to purpose-built student accommodation. Therefore, exempt from CGT will be such purpose-built student accommodation as encompasses either a building that is purpose-built or is converted for use by students, which consists of at least 15 bedrooms and is occupied more than 50% of a tax year by students attending a course of study or is accommodation excluded from registration under the Housing Act 2004 (as a house in multiple occupation) by virtue of being controlled or managed by a higher or further education establishment.

Scope of the new rules

The new rules will apply to non-resident individuals, as well as to non-resident trustees, personal representatives of non-resident deceased and some non-resident companies which dispose of residential property. Non-resident persons who are partners in a partnership disposing of UK residential property will also be subject to the new rules with each partner subject to a CGT charge based on the extent to which such partner is entitled to the gain made on the disposal.

Application of rules to non-resident companies

For non-resident companies, the CGT rate applicable will be the UK corporation tax rate of 20% and such companies will have access to limited indexation allowance. In addition, a limited form of pooling is to be available for non-resident companies in the same group (broadly encompassing those companies which are required to consolidate their accounts) to offset gains and losses on disposals of UK residential property.

Given the exemption from the charge for companies with diversely held institutional investors, the CGT charge is expected to be limited to non-resident companies that are essentially the private investment vehicles of individuals, families or small groups of individuals.

Non-resident companies may also be subject to an ATED-related CGT charge on the disposal of residential property which falls within the new CGT regime.  There is no intention to change the ATED regime as the Government considers that ATED-related CGT was brought in for separate policy reasons to act as an anti-avoidance measure. Therefore, there will be circumstances where both CGT and ATED-related CGT apply to the same gain. In order to avoid double taxation in these circumstances, the ATED-related CGT charge will take precedence with the applicable tax rate being 28% in respect of a gain falling within the ATED regime. It is expected that, broadly, the ATED-related CGT charge would apply to a non-UK resident company which does not develop or rent out the UK residential property, while the CGT charge would apply where, during part or the entire period of ownership after April 2015, the non-UK resident company has developed or rented out the property on a commercial basis.

Application of rules to non-resident individuals

For non-resident individuals, CGT will be chargeable at the same CGT rates as are applicable for UK resident individuals, being 18% or 28% depending on the individual's income and chargeable gains for the year. Non-resident individuals will also be able to benefit from the annual exempt amount available to UK residents which exempts up to £11,000 of gains in the current tax year.

In addition, whilst the PPR exemption will be available to non-resident individuals who sell their UK residential property, the application of this relief will be limited to situations where the individual has resided in the property (or in other properties in the UK) for at least 90 midnights in that year. It can only apply to one main or the only residence for the tax year at the time of the disposal although if an individual has more than one residence they can nominate which of them is their main residence. For married couples and civil partners, residence by a spouse or partner will be regarded as occupation by the other spouse.  PPR exemption can also apply to a trust where the beneficiary is non-UK resident and meets these same requirements.

The Government is not intending to change other features of PPR exemption for non-residents (such that favourable rules which extend PPR exemption, for instance, final period relief, will continue to apply).  However, care should be taken if a non-resident were to rely on PPR exemption, as an individual residing in the property for 90 days could become UK resident for tax purposes. Consequently, consideration could be given to dividing the time of occupation of the property between an individual and his or her spouse or civil partner in order to meet the 90 day rule.

Calculating the gain and paying the tax

The good news for non-resident owners of residential property is that the proposed CGT charge will not apply to any gain relating to periods prior to April 2015. The Government will allow a rebasing of the property value at April 2015 or, at the option of the taxpayer, a time apportionment of the whole gain over the period of ownership (unless the property is also subject to ATED-related CGT). Rebasing will mean that only the disposal price above the April 2015 value (after deduction of allowable costs) will be subject to the CGT charge.  Consequently, non-residents will not need to reorganise their holdings of UK residential property in order to "step up" the basis of their property as at April 2015 in order to minimise any future gains subject to the CGT charge.

We recommend that non-residents seek a valuation of their residential property by 6 April 2015 from a recognised third party, such as a professional valuer, in order to support the market value of the property at that time.

Non-residents making a disposal of their UK residential property will, in future, need to report to HMRC within 30 days of completion that a disposal has been made and make a payment of the CGT due. For persons with a relationship with HMRC, it is envisaged that they will instead pay their tax with their self-assessment return.  There will be no obligation on those involved in the transaction to collect the tax due, but the Government is expecting that they will facilitate the process. HMRC will also expect to be notified if there is a loss or no gain on the sale of the property or if gains are covered by the annual exempt amount.


We welcome the Government's decision to allow a rebasing of property to April 2015 to ensure that, subject to any application of ATED, gains accruing on a residential property before that date remain exempt from UK CGT. This will avoid the need for non-residents to restructure their holdings of UK residential property. However, in future, non-residents will need to consider the CGT cost on the disposal of their property and factor this cost of sale into the transaction as tax could be due within 30 days of the sale.