Capital Gains Tax on the sale of UK Residential Property by Non-Residents
The new change in Capital Gains Tax is getting closer. Anyone who lives outside the UK and has a residential property in the UK either under their own personal name or by using an corporate entity is affected.
The new charge will apply to gains from 6 April 2015.
With effect from 1 April 2015, Capital Gains Tax (CGT) will become payable in respect of any gain realised on the sale of UK residential property by a non-UK resident individual, partnership, or a non-UK company which is in narrowly controlled ownership.
UK resident individuals are currently subject to CGT on gains made on residential property provided that the property is not their Principal Private Residence (PPR) or, if they own more than one property, the one nominated as their main residence.
The main changes which are to apply:
• The new CGT charge on non-residents applies to “property used or suitable for use as a dwelling”.
• It also applies to residential property used for letting purposes (unlike the current exemption from the existing Annual Tax on Enveloped Dwellings (ATED)-related CGT charge).
• Certain types of properties are exempt from the CGT charge which is for communal use, e.g. boarding schools, nursing homes and certain types of student accommodation.
• The CGT charge will apply to all residential properties regardless of their value.
• The existing ATED-related CGT charge limits the charge to properties for which the consideration for disposal exceeds a specified “threshold amount”. This is currently £2 million and is due to decrease to £1 million from 6 April 2015 for gains accruing after that date.
• The charge will apply to gains made by individuals, trustees and closely held non-resident companies.
• Principal Private Residence (PPR) relief will become available for the first time subject to new rules for PPR, applicable both to non-UK residents in relation to residential property in the UK and UK residents in relation to property overseas.
• PPR will not be available for non-UK residents in relation to residential property in the UK for a tax year unless either:
- the person making the disposal was tax resident in the country where the property is located for that tax year; or
- the person spent at least 90 midnights in that property in that tax year – the “90-day rule”. (If a person has more than one property in a country in which they are not tax resident, it appears that he or she may aggregate the number of midnights spent in any of those properties in the relevant tax year in order to meet the 90-day rule).
• CGT is payable at 18% for basic rate taxpayers and 28% for higher rate taxpayers.
• The rate for trustees will be 28%. Non-resident individuals will have access to the annual exempt amount of taxable gains, in line with UK residents.
• The rate for companies will mirror the UK corporate tax rate, currently 20%.
• Please note that non-resident companies may be subject to the Annual Tax on Enveloped Dwellings (ATED). The ATED-related CGT charge is used to deter enveloping (using companies and partnership) of residential property. This charge will remain at 28% on disposals of property subject to ATED. There is a risk of double taxation, where part of the gain could be subject to both ATED-related CGT and the new CGT charge. In this event the ATED-related CGT charge will take priority and any remaining gains will be taxed under the new rules.
• The new rules will not apply to gains relating to periods before 6 April 2015. You will have three options, as follows:
- rebase to 6 April 2015 (in which case, any gains made post-6 April 2013 may be liable to ATED-related CGT, if relevant for that period);
- time apportionment of the gain (unless the property is also subject to ATED-related CGT);
- choose to compute the gain or loss over the entire period of ownership, mirroring the option under ATED-related CGT.
• The extended CGT charge will only apply to gains accrued and realised on or after 6 April 2015. It will not apply to gains arising before this date. To calculate the charge on a property purchased before this date taxpayers may either:
- ‘rebase’ the property to its market value on 6 April 2015 (this is the default position);
- ‘time apportion’ the whole gain over the period of ownership; or
- compute the gain (or loss) over the whole period of ownership.
• The vendor of the property will have to notify HMRC of the sale within 30 days and if they are already within the UK tax system the tax will be collected via their self assessment. A new system will be devised for non-residents not already within the UK tax net but they will need to make the tax payment along with the notification.
Steps to take to mitigate the tax
• Recommend that a proper valuation of the property is done in April 2015.
• Move ownership from an individual’s name into an offshore company (however Stamp Duty will apply for the transfer and will be liable to ATED).
• Transfer to third parties such as children before the new tax becomes applicable in April 2015. Our conveyancing lawyers can this for you very quickly.
• Nominate the UK property as their only or main residence for a tax year at the time of disposal.
Speak to our conveyancing solicitors how this can be achieved.