New UK Capital Gains Tax on residential property held by non UK residents
The scope of UK Capital Gains Tax (CGT) was extended to non-UK residents selling UK residential property interests.
On 6 April 2015 the scope of UK Capital Gains Tax (CGT) was extended to non-UK residents selling UK residential property interests (UK residential property). This is the latest step in a series of significant changes affecting the taxation of UK residential property following on from the Annual Tax on Enveloped Dwellings (ATED) tax, which subjects properties currently worth £1m or more to an annual tax where they are held in a corporate vehicle.
The definition of a ‘residential property interest’ is actually quite wide and includes property of any value which is suitable for use as a ‘dwelling’ (or is being constructed or adapted for use as a dwelling).
The charge will also be triggered by the assignment of rights to acquire a UK residential property, such as the sale of a purchase contract for a property in a new development. The latter point would of course catch the practice of ‘flipping contracts’ therefore bringing them within the scope of the new charge.
There are however certain ‘dwellings’ that are exempt from the charge, those being:
- Boarding schools and institutions for children
- Hospitals and care homes
- Hotels, inns etc
- Purpose built student accommodation
The intention of the new legislation is to put non-residents on equal footing with residents so there are no punitive rates and non-residents will also receive the same allowances/exemptions as residents.
It is still possible to claim that the UK property is your personal private residence and therefore exempt the profit from tax, however the UK Government have now made that slightly more difficult. In order to claim the exemption going forward, the individual must be resident in the country where the property is situated or spend at least 90 days in that property or other properties in the same jurisdiction.
Anyone qualifying under the initial part of the relief for a UK property would in all likelihood already be subject to UK taxes and therefore, not really a concern to the UK. The 90 day rule will, however, make it far more difficult for non-UK residents to claim the exemption and therefore, more likely to bring them within the scope of the new legislation.
If the individual did meet the minimum 90 day occupation rule, then under the UK’s statutory residency test, depending on other factors that may link them to the UK, they could actually be UK resident for tax purposes which could open up another can of worms altogether!
Focussing back on the CGT charge, only gains made from 6 April 2015 are taxable when the property is sold. The new regime affects non-UK resident individuals, trustees, closely-held companies and partners in partnerships disposing of a UK residential property interest.
Property owners are able to use the market value of the property as at 6 April 2015 as its acquisition cost or they can use the actual acquisition cost, with tax only being due on the time-apportioned post April 2015 part of the gain. In order to ascertain the rebased acquisition cost, it may be sufficient to obtain valuations from a few different estate agents however, to avoid any protracted negotiations with HMRC in the future, a valuation from a qualified surveyor would probably be more robust.
Furthermore, the valuation should be obtained as soon as possible as it could be more difficult to demonstrate a historic valuation at the point of sale.
The rate of tax on any post April 2015 gains for individuals will be 18% or 28% depending on the individual's UK income. Currently, non-UK resident individuals are still able to claim a full CGT allowance which for the 2015/16 tax year is £11,000, however, personal allowances for non-UK residents is a hot topic at the moment and an area currently being reviewed by the UK Government.
Offshore companies will pay the new tax at the corporation tax rate for UK companies which is 20% with an indexation allowance for inflation. However, if the property being sold is subject to the ATED charge then some or all of the gain may be taxed at 28% going back to 6 April 2013. Non-resident trustees will be subject to tax at 28% and as partnerships in the UK cannot be directly taxed, any non-resident partner will be taxed directly on their share of the gain.
Individuals and companies will need to report relevant disposals to HMRC within 30 days of the sale irrespective of whether the gain exceeds the annual CGT exemption or not.
Where the vendor has an existing relationship with HMRC, they may pay any tax due as part of their self-assessment return however, in all other cases, payment must be made within 30 days of the disposal.
Summary key points
- A professional valuation should be obtained as soon as possible as this, together with the sale price, will be required by HMRC to calculate the gain
- Non-UK resident individuals have an annual CGT allowance of £11,000 for 2015/16
- Residential property interest covers property of any value which is suitable for use as a dwelling (or is being constructed or adapted for use as a dwelling)
- Off-Plan’ transactions also caught