Capital gains tax on property held by non-UK residents

The UK government issued a consultation document in March 2014 on implementing a capital gains tax charge on gains made on UK residential property disposals by non-residents. The charge is expected to take effect from April 2015.

Until now, capital gains tax (CGT) has not applied to non-residents. This means that a UK resident individual disposing of a UK private residence may, in the absence of other reliefs, be chargeable, whereas a non-UK resident individual would not.

This is unfair, so the government has decided to introduce provisions to bring the taxation of UK property owned by non-residents into line with that suffered by UK residents.

Wider scope

The new charge will apply not only to individuals, but also to partners in partnership (partnerships being tax transparent) who will be charged on their share of the relevant gain; non-UK resident trustees will also be liable to CGT on disposals of UK residential property.

This contrasts with the current CGT charge where the tax, is in effect, borne by the settlor or beneficiaries, rather than the trustees, dependent on their residence and domicile status and whether they pay tax on the remittance basis.

Collective investment schemes in the form of offshore funds will not be caught by the new charge provided that they satisfy the ‘genuine diversity of ownership’ test, aimed at closely controlled structures.

Small groups of connected persons using offshore structures would be caught.

Where a UK resident fund would not be subject to tax at all, such as pension funds, a non-resident fund will be similarly exempt.

The new charge will also not apply to offices or industrial buildings that cannot be used as dwellings, or to residential property for communal use, such as boarding schools, halls of residence, nursing homes, hospices and prisons, but will apply to student accommodation.

However, disposals of multiple dwellings in a single transaction (which would be treated as non-residential land for stamp duty land tax purposes if six or more dwellings were involved) will not be excluded.

Companies (both UK resident and non-UK resident) not carrying on a genuine business such as letting or development will be subject to the existing ATED- (annual tax on enveloped dwellings) related charge.

Those that are not within the ATED-related charge, if they are non-UK residents which own UK residential properties (including companies carrying on genuine property business) will be subject to the new charge.

The new charge would complement the ATED regime, introduced from April 2013 for UK- and non-UK-resident companies disposing of UK residential property, other than that for genuine commercial letting or development. 

However, whereas the ATED only applies to properties valued at over £2m on the relevant valuation date, £1m from 1 April 2015 and £500,000 from 1 April 2016, the new CGT charge will have no minimum (except perhaps the annual allowance – currently £11,000).

Little effect for many

For most non-resident individuals selling their properties, there will be little effect. Many double-tax agreements provide for the taxing rights to belong to the jurisdiction in which the property is situated.

Unless the individual resides in a jurisdiction with a lower rate of gains tax, they will be no worse off; they will pay the tax in the UK, whereas they would previously have paid it in their own country. This will bring the UK into line with other countries such as Australia and Canada.

The initial consultation period has closed and the government is considering the representations made. Many questions remain to be answered:

  • Will principal private residence relief be available? Many persons living in the UK will not be non-resident.
  • How will principal private residence be established? This is particularly difficult where one taxpayer lives in one location for work purposes and the family are resident elsewhere; at present, a family can only have one principal private residence
  • Will the election for principal private residence be abolished?
  • How will the tax be collected? Will the conveyancing solicitor be responsible for paying over the tax, thus increasing the conveyancing cost?
  • How will the taxpayers be identified? Legislation must ensure that EU taxpayers are not disadvantaged.
  • What will the tax rate be and will the annual exemption be available? At present, UK taxpayers are charged at 18 per cent or 28 per cent, dependent on their other income.
    How is the gain to be measured? Will the valuation be re-based as at 5 April 2015?
  • Any property suitable for use as a dwelling is within the charge; how is a dwelling to be defined?
  • Will the government tax property investment fund at fund level or exempt them?
  • With the new charge on non-resident trustees, how will the present CGT trust regime be affected?
  • Where ATED and the new CGT charge apply, which will take precedence? How will they interact?
  • Will this legislation discourage foreign investment?

Updates will be available over the coming months. It would be advisable to discuss the impact with non-UK resident clients as there is a degree of confusion in the marketplace.

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