Capital Gains Tax Charge on Non-Residents

Individuals who are not resident in the UK are generally exempt from capital gains taxCapital Gains Tax ("CGT") applies in certain cases when an asset is sold for more than it was originally purchased.  The taxable gain (profit) may be triggered following the transfer of an asset, although commonly this would follow a sale.  A number of tax reliefs are available to exempt or reduce the tax that may apply.  Basic tax planning may... More (CGTCapital Gains Tax ("CGT") applies in certain cases when an asset is sold for more than it was originally purchased.  The taxable gain (profit) may be triggered following the transfer of an asset, although commonly this would follow a sale.  A number of tax reliefs are available to exempt or reduce the tax that may apply.  Basic tax planning may... More) on gains made on the disposal of their UK assets.  However, since 6 April 2015, gains made by non-residents on the disposal of UK residential property will become chargeable to UK CGT.

Who could become taxable?

Any of the following who own and dispose of a UK residential property:

  • An individual who is not deemed to be resident in the UK as defined by the Statutory Residence Test.
  • Non-resident personal representatives of an estate of a deceased person.
  • Non-resident trustees of a settlement.
  • Non-resident partners of a partnership or members of an LLP.
  • Non-resident companies, excluding:
    • A ‘diversely held company’. Broadly speaking, this is a company which is not controlled by five or fewer participators. Typically, this will include small, family-run companies.
    • A unit trust scheme.
    • An open-ended investment company.

What is taxable?

Most disposals of an interest in UK residential property are now taxable if they are considered to be a dwelling during a relevant period of ownership.

The ‘relevant period of ownership’ is the period beginning on the later of the day the property was purchased and 5 April 2015, and ending with the day before the disposal takes place.

A property counts as a dwelling when it is used (or is suitable for use) as a dwelling or is in the process of being constructed or adapted for such use.

Communal accommodation will not fall under the heading of a dwelling, examples of which include residential accommodation for school pupils or members of the armed forces, residential care homes, hospitals and hotels.

ATED

The draft legislation has confirmed that these new rules will be in addition to, rather than in place of, ATED-related CGT, which applies where a company owns a high-valued residential property.

Principally, this is because the two regimes seek to achieve different objectives; the disincentivisation of enveloped structures and the levelling of the CGT regime to owners of UK residential interests.  This is also because ATED-related CGT applies a 28% rate, whereas the new regime will apply the existing CGT/CT rates of 18%/28% for individuals and 20% for companies.

Where both CGT charges potentially apply, the ATED CGT will take precedence.

Unlike ATED, the CGT charge will apply on residential property used for letting purposes, and there is no de minimis limit on the value of the property involved.

How is the gain calculated?

The default method of calculating the gain arising will be to calculate the uplift in the property’s value from 6 April 2015 to the date of sale.

Alternatively, it is possible to elect to time-apportion the gain on a straight line basis, with the relevant proportion being the gain accrued from 6 April 2015. It is also possible to elect to use the original cost of the property rather than its value at 5 April 2015 in arriving at the taxable gain.

Payment and administration

Non-resident individuals and companies will need to report the disposal to HMRCHer Majesty's Revenue and Customs (HM Revenue and Customs or HMRC) is a non-ministerial department of the UK Government responsible for the collection of taxes, the payment of some forms of state support and the administration of other regulatory regimes including the national minimum wage.... More within 30 days of sale of the property and make payment of the tax at the same time.  If they are already within Self-Assessment, the gains will be reported as usual within a tax return, and the tax payment should be made at the usual time.

Principal Private Residence Relief (PPR)

There may be one silver lining to this cloud in that non-resident individuals may be able to elect for their UK residential property to be treated as their main residence, which would exempt a proportion of the gain under the PPR rules.

However, these rules are extremely complicated and require careful consideration.

Summary

As can be seen, these rules are complicated and there are a number of factors to be aware of which will affect non-UK resident individuals and companies who own UK residential property. 

If you are a non-resident landlord and would like advice on how these changes could impact you or your company, please contact us.