Capital gains tax on residential properties owned by non-UK residents

The UK government has announced further details of the proposed tax charge on non-residents that will apply from 5 April 2015. Thomas Adcock, Tax Partner at CBW, explains.

  • The rates of tax where the property is owned by a non-UK individual, a trust or a deceased estate will be the normal 18 per cent and 28 per cent rates. The crossover from 18 per cent to 28 per cent will be based on the individual’s UK income and gains. A non-resident individual will also be entitled to the capital gains tax annual allowance.
  • If the property is held by a non-UK company, the rate of tax will be the corporation tax rate, which will be 20 per cent from 1 April 2015. This means that a non-UK resident individual who owns a property personally ought to consider transferring it to a non-UK company (unless of course the reason that the property is owned by the individual to avoid ATED, the Annual Tax on Enveloped Dwellings). The annual allowance is £11,100 and the 18 per cent rate applies to the next £31,865, so the effective rate will exceed 20 per cent where the gains exceed £70,425.
  • The proposal to abolish principal private residence (PPR) elections has been abandoned. A taxpayer will still be able to make such an election. However, nobody (whether UK or non-UK resident) will be entitled to elect a non-UK property as their main residence for a tax year unless either they have occupied that property for at least 90 midnights in that tax year, or they are tax-resident in the country in which the property is situated. It is not clear how this will work, as the election does not apply by reference to tax years, but by reference to dates chosen by the taxpayer. A non-UK resident will not need to make the PPR election when he acquires a second property. He will make the election at the time of disposal of a property.
  • The taxpayer will be able to choose whether to eliminate the pre-6 April 2015 gain by revaluing the property at that date or by time apportioning the gain between the pre and post-5 April 2015 periods. Time apportionment cannot be used where the property is within the scope of ATED.
  • Losses on disposals will be ring fenced and deductible only against gains from residential properties in the same or a subsequent year. If the taxpayer becomes UK-resident, any unused losses in the non-resident period will be transformed into normal CGT losses. If a UK resident emigrates with unutilised losses, he will be entitled to identify any that arose from the disposal of UK residential property and preserve them for use against future gains on UK residential property.
  • The details of how to collect the charge have not yet been finalised. The current thinking is:
    • the non-resident will be required to notify HM Revenue & Customs (HMRC) of the disposal within 30 days of the property being conveyed. The notification form will be the opportunity to make a private residence exemption
    • where the non-resident already makes a self assessment return, they will have to notify the gain and pay the tax after the end of the tax year when they submit that return. It is not clear whether this includes a non-resident landlords’ tax return. We think that it probably does. However an ATED return will not count as a tax return for this purpose
    • a person who does not have such an established relationship with HMRC will have to calculate the gain, submit a return and pay the tax within 30 days of the date of completion of the disposal. This looks completely impractical. HMRC expects/hopes that the solicitor dealing with the conveyance “will facilitate the process”. We suspect that may be wishful thinking. It does, however, need to be borne in mind that HMRC is notified of UK property transactions and that the UK has agreements with many countries for the mutual enforcement of tax debts. Accordingly, non-compliance with this obligation is likely to result in having to pay interest and a penalty when HMRC eventually discover that the tax is due.
  • Residential property will be defined as property suitable for use as a dwelling, including land used as its garden or grounds (but excluding communal residential property, such as care homes). It will include sheltered accommodation and property that is in the process of being constructed or adapted for residential use (but not land with planning permission where construction has not started). It will also include a right to acquire a UK residential property “off-plan”. Purpose-built student accommodation will be excluded from the charge. This is limited to a building for use by students consisting of at least 15 bedrooms and which is occupied for more than 50 per cent of a tax year by students for the purpose of attending a course of study. It will also include accommodation that is excluded from registration under the Housing Act 2004 as a house in multiple occupation by virtue of being controlled or managed by a school or university with the management being in conformity with an approved Code of Practice.
  • Companies will be within the scope of the charge only if they are “narrowly controlled”. This will be based on the definition of a close company (but not so as to treat partners as connected with each other). The interest of “closely-related family members” (not yet defined) will be aggregated in determining whether a company is controlled by five or fewer persons. There will be anti-avoidance rules aimed at protected cell companies and at arrangements intended to sidestep the control test.
  • An overseas group of companies will be able to pool gains and losses. However in order to do so it will be required to provide to HMRC “clear information regarding the ownership of the companies holding UK properties”. A de-pooling charge will be imposed where a company leaves the group. This charge could make it dangerous to use a pooling arrangement.

Thomas Adcock
CBW Tax Partner

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