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Capital gains tax on residential property disposals by non-residents

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5 December 2014

Earlier this year a consultation document was published by the government proposing that capital gains tax (‘CGT’) on UK residential properties would be extended to non-residents.  The aim of the consultation was to align the tax treatment to that of UK residents who are already subject to CGT on disposals of a UK home which is not their primary residence.

Following a period of consultation HMRC have now published the results and we set out below a summary of the proposed new rules and potential implications.

Key facts
  • The charge will apply to a disposal of UK residential property by non-resident persons.
  • Residential property is “property used or suitable for use as a dwelling”, including let properties and any property that is or potentially could be used as a dwelling.
  • Non-resident person includes individuals, trustees, personal representatives and some companies (but most institutional investors and companies that are not controlled by 5 or less persons will be excluded from the charge).
  • The tax rate will depend on the disposing party, however, this will broadly follow the CGT rates for individuals (currently 18/28%) and the corporation tax rate for companies (currently 20%) subject to certain reliefs.
  • Non-resident individuals and trusts may qualify for the annual CGT exemption (currently £11,000 and £5,550 respectively) to offset against any liability.
  • Principal private residence relief (‘PPR’) will be restricted for non-residents with UK residential property and UK residents with overseas properties. No changes to PPR, however, will be made for UK residents holding UK property as originally mooted, which is a much welcomed piece of news.
  • Some residential properties which have a communal main use are excluded from the new rules. This includes care homes and student accommodation.
  • If the non-resident company is already subject to the ATED regime, the CGT charge under ATED will take precedence.

Further detail

There will be a rebasing as at April 2015 such that only gains accruing after the date the new legislation is introduced will be taxed.  If, however, the purchase value was higher than the sale value an election can be made to apply the base cost.  It is also possible to apportion the gain on a time basis, however, we would expect limited circumstances as to when this would provide a better result. 

Where a non-resident individual (or beneficiary of a trust) spends 90 nights or more in the UK property in a given tax year, they will be able to claim PPR and hence will not be subject to CGT for that tax year.  This can only be claimed on disposal of the property.  For example, if the property has been held for 20 years and the 90 night rule is met for 10 of those years PPR could be claimed on half of the gain.  This is most likely to apply to those non-residents using the property as a holiday home but the impact on their UK resident status would need to be considered here.

The changes will take effect from 6 April 2015 and draft legislation will be included in the next Finance Bill which is anticipated shortly.

How we can help
  • Structuring of a future purchase of UK residential property e.g. company versus personal ownership, including consideration of the application of these new rules and the ATED regime, coupled with the new changes to the SDLT bandings.
  • Advice in respect of disposal of a UK residential property, including whether PPR may apply, UK resident status and whether a taxable gain may arise and the most appropriate election to make to calculate base cost of the property.

If you would like to discuss your options further, please do get in touch with Nick Haines.