Capital Gains Tax - What is happening?
As a further extension to the UK CGT regime, many non-UK residents disposing of UK residential property on or after 6 April 2015 will need to pay non-residents capital gains tax (‘NRCGT’) to the extent that the disposal results in chargeable gains on or after that date. The legislation is complex and consists of over 70 pages of detailed drafting and lacks clarity in a number of places. It applies to non-resident individuals, trustees, closely-held companies and offshore funds treated as companies (e.g. JPUTs).
Why is CBT changing?
Prior to 6 April 2015, provided not within the ATED regime, non-UK residents disposing of UK residential property did not normally fall within the scope of CGT. NRCGT is aimed at providing greater fairness between UK residents who would normally be and non-residents disposing of residential property, who may otherwise not be.
What is the result?
As a result of the changes, the CGT net has been further widened. The rules have become even more complex, depending on the residence and nature of the disposer, as well as the type of asset that is being disposed of. We now have an entirely different set of rules for residential property and for commercial property (and, in fact, several different regimes for residential property itself).
What does the extended CGT apply to?
NRCGT applies to non-residents disposing of a “UK residential property interest”.
This term is defined broadly. It catches land that, at any date on or after 6 April 2015 (or at any date since the disposer acquired it, if later), is/has been suitable for use as a dwelling. This includes land that is in the process of being constructed/adapted as a dwelling. As a new head of charge, it also expressly catches disposals of contracts for an off-plan purchase, if the land to be acquired under the contract is to be constructed/adapted as a dwelling. The grant of an option will also be treated as a disposal.
Furthermore, if a non-resident acquires a dwelling and then converts it to commercial property, a later disposal will nevertheless be within the NRCGT charge.
What does it not apply to?
There are some exemptions to the new charge, including “purpose built student accommodation” (if certain criteria are met), accommodation for school pupils, care homes, hospitals and prisons.
Note that if the disposer is a non-resident company that is trading in property in the UK through a permanent establishment, the new CGT will not apply. Instead, as currently, any gains from disposals will be chargeable as part of the permanent establishment’s corporation tax profit.
What about disposals of shares in a company?
NRCGT does not apply to disposals of shares or units in companies or funds, so indirect disposals will remain outside the scope of the charge.
Who does the new CGT apply to?
NRCGT applies to:
- Non-resident companies at 20% if closely-held, i.e. under the “control” (directly or indirectly) of 5 or fewer participators. Broadly speaking, “control” includes ownership of a majority of a company’s share capital, voting rights or entitlement to assets on winding-up (the latter disregarding loan creditors). Furthermore, rights possessed by family members (and other associates) of a participator are attributed to that participator.
Exceptions: subject to anti-avoidance measures, a company will not be treated as closely-held if one of the 5 or fewer participators requisite for it being treated as closely-held is itself a company that is not closely-held. Furthermore, any share/interest held by a “qualifying institutional investor” will be treated as being held by more than 5 participators. A qualifying institutional investor is:
- a general partner of limited partnership which is a collective investment scheme (criteria apply);
- a unit trust scheme or an OEIC in either case fulfilling the “widely-marketed” fund condition (see below);
- a trustee or manager of a qualifying pensions scheme (certain criteria apply and there are some exceptions);
- a company carrying on life assurance business; or
- a person enjoying sovereign immunity (for example, a sovereign wealth fund).
Notably, this list does not exactly mirror the similar rules in the REIT regime and care should be taken. In particular, charities do not appear in this list. It is understood that the precise drafting is still open to revision by HMRC and so may yet undergo some tweaking.
Importantly, even if a non-resident company is diversely-held or falls within any of the exceptions set out above, it will need to file a claim within 30 days that NRCGT does not apply to the disposal. If it fails, late filing penalties will apply.
As mentioned above, if the disposer is a non-resident company who is trading in property in the UK through a permanent establishment, NRCGT will not apply.
For companies caught by the extended charge, an indexation allowance will be available, and there will be a limited form of group relief.
- Non-resident individuals at 18%/28%. There are no exceptions.
- Non-resident trustees at 28%. There are no exceptions.
- What about funds?
NRCGT applies to offshore funds treated as companies, at 20%. At present, there are some drafting issues around collective investment schemes that are deemed to be treated as companies elsewhere in the CGT legislation. However, for consistency, it is considered that they will be likely to be treated as companies for this purpose.
Funds structured as partnerships will be treated as transparent: if the individual partners fall within the scope NRCGT, they will be taxed, broadly, as if they held a proportion of the property directly.
Exceptions: NRCGT does not apply to funds falling within one of the qualifying institutional investor definitions (above) or which are not closely-held. Onshore funds and UK REITs would be outside the scope on general principles.
“Widely-marketed” fund condition: broadly speaking, this condition will be satisfied if, during the period of ownership of the property (or the 5 years preceding the disposal, if shorter) its units are marketed and made available to investors who are not just a limited number of specific persons/groups of connected persons).
As a change to existing rules for offshore funds, umbrella funds (holding residential property), where the gain or loss on the disposal is primarily or wholly attributable to a particular division of the umbrella fund, will be assessed on the basis that that division is a distinct entity for the purposes of the widely-marketed fund condition.
Anti-avoidance measures may apply if the main purpose (or one of main purposes) is to avoid NRCGT.
Are reliefs available?
Unlike the ATED regime, there is no relief for property rental business.
The following reliefs may, however, be available:
- group relief (for losses of offshore companies on residential property within an NRCGT group), though there are corresponding related anti-avoidance provisions, such as degrouping charges;
- offsetting of losses on NRCGT disposals (although losses are ring-fenced to be available only for NRCGT disposals);
- indexation (for companies only);
- annual exempt amount: for individuals £11,100, for trustees £5,550 (but not available for companies);
- rollover relief;
- hold-over relief;
- for individuals private residence relief (‘PPR’) may be available to reduce NRCGT liability to zero. However, in its application to non-residents, PPR will now only be available where the non-resident (or their spouse) has spent at least 90 midnights occupying the property (or another property they own in the UK) as a residence, and they elect that the property being disposed of is their principal residence in the UK.
How is the gain calculated?
There are lengthy and complex provisions dealing with calculation of gains for NRCGT but, broadly, a gain is calculated in the same way as for CGT, i.e. disposal proceeds lest cost of acquisition, cost of disposal and improvement costs. As stated above, for non-resident companies, indexation may apply.
What if the property was held before 6 April 2015?
There is a choice for persons disposing of a property that they held at 5 April 2015:
- the default method of calculating the acquisition cost is re-basing the property to market value on 5 April 2015; but
- a person can elect to apply a straight-line time apportionment method; or
- decide to make neither an apportionment nor apply re-basing (e.g. to establish a loss).
How does NRCGT interact with ATED?
Broadly speaking, gains arising from the disposal by non-resident companies of residential property subject to the ATED regime (ie residential properties over £1m for 2015-2016 and over £500k from April 2016), will continue to be taxed at 28% (ATED-related CGT). If an ATED-related CGT charge applies, this overrides the NRCGT rate of 20% for companies.
However, there are certain reliefs from ATED-related CGT: these include commercially letting the property to a third party. Where such a relief from ATED applies, disposal gains will be charged to NRCGT at the rate of 20%.
How to file?
A filing must be made within 30 days of disposal of the relevant interest – whether or not an exemption can be claimed or any tax is payable.
For those not already within the UK tax net, the NRCGT charge is also payable within 30 days
For those already within the UK tax net, who have a UTRN (e.g. non-resident landlords), tax is payable on the normal tax payment date, ie by 31st January following the end of the relevant tax year.