Property: capital gains tax charge on non-UK residents

The government announced in the 2013 Autumn Statement that it intended to introduce a capital gains tax (CGT)
charge on the disposal of UK residential property by non-residents, with effect from April 2015. Further details were included
in a consultation document published on
28 March 2014.

This change would bring the UK’s tax system into line with those of a number of other developed economies.

The announcement followed the introduction from 6 April 2013 of the Annual Tax on Enveloped Dwellings (ATED) regime, under which a CGT charge can apply to certain taxpayers (mainly companies), whether UK or overseas resident, on disposals of residential property valued at more than £2m (a limit that is due to fall to £500,000 by April 2016).

Under current legislation, other non-UK residents do not normally pay tax on disposals of UK residential property or any other UK assets, unless, for example, the sale is part of a trade being carried on in the UK.

n Basic rule

The government intends to extend CGT to non-UK residents, whether individuals, companies or trusts, holding UK residential property directly, irrespective of the value. The charge would also apply to disposals of residential property by partnerships where a partner was non-resident.

It is not yet clear how these rules would interact with existing legislation designed to counter tax avoidance involving the routing of gains via overseas entities such as trusts.

n Rate of charge for individuals

Individual UK residents are normally liable to CGT at a rate of 18 per cent, or 28 per cent if they are higher-rate income tax payers. They are also entitled to an annual exemption, which is currently £11,000. It is proposed that these rates and annual exempt amount will also apply to non-resident individuals, who will therefore be required to declare their UK income and gains to determine whether or not they are liable at the lower or higher rate.

It appears that non-resident trusts will be liable at the 28 per cent rate with an annual exemption of £5,500, in the same way as UK trusts, but the point is not entirely clear.

n Rate of charge for companies

For companies, the CGT rate on property falling within the ATED regime is 28 per cent. The CGT rate to be charged on non-resident companies under the new rules on properties outside the ATED regime is to be announced by the government at a later date.

This new rate will apply to residential properties that are outside the ATED regime because they are valued at less than £500,000, and also to residential properties that are valued at more than £500,000 but qualify for relief from the ATED-related CGT charge, for example because they are let at a market rental. Commercial property is not included in the new charge.

An overseas landlord company will therefore be placed in essentially the same position as UK companies, for which, under current rules, the increase in value of a residential property may be made up of a number of ‘slices’, taxable at either the ATED-related CGT rate of 28 per cent, or at a different rate (in the case of UK companies, the normal corporation tax rate), depending on the use made of the property.

There may be a case for abolishing the ATED-related CGT charge altogether, so that a single charge applies to all gains made by companies.

n Rebasing

When the proposals were announced initially, it
was thought likely that rebasing provisions would be introduced so that only the portion of the gain accruing after April 2015 would be subject to the CGT charge. This would follow the way a gain is calculated for the purposes of the ATED-related
CGT charge.

However, the consultation document was somewhat ambiguous on this point, but the general view is that some form of rebasing will apply.

A system without rebasing would effectively amount to retrospective taxation, because gains accruing before the introduction of the legislation, perhaps over a period of 30 years or more, would be within the charge.

It is important that the government’s intentions on this point be made clear as soon as possible.
If there is to be no rebasing, many long-term
owners may wish to dispose of their properties before April 2015.

n Principal private residence relief

Principal private residence (PPR) relief has the
effect that individuals do not pay CGT on gains accruing on a property during periods when it is their main residence.

Currently, an individual with more than one residence can make an election, within certain time limits, as to which of the properties will qualify for PPR relief. The elected property need not be the one that is the main residence.

If this system were maintained unchanged after the introduction of the new charge, many non-residents might well elect for their UK property to benefit from the relief because their other (non-UK) residences would be outside of the scope of UK tax in any event. This would largely negate the effect
of the new rules as far as non-resident individuals are concerned.

The government is therefore considering
two possible changes to the PPR relief. Under the first, the facility to make an election would be removed and the relief would only be available on properties that were demonstrably the individual’s main residence.

Under the second option, the election would be replaced by a fixed rule to determine which residence was eligible for relief, for example, the residence in which the person was physically present for the longest period in the tax year.

Any such change to the PPR rules could have a significant effect on UK-resident individuals. The existence of the election facility acts as a major simplification in the current system in circumstances where it would be difficult for the taxpayer or HMRC to say with any certainty which was the main residence as a matter of fact.

Any ‘day-counting’ rule would involve an enormous burden of record keeping and would undoubtedly produce an anomalous result in many cases. It would seem that the perceived problem might be dealt with by a simple rule that a UK property could not be the main residence for a year of assessment or split year in which the taxpayer
(or the occupier in the case of a property owned
by a trust) was not resident in the UK.

n Collective investment funds

The consultation document of 28 March 2014 indicated that the government did not intend pension funds and other collective investment funds to be brought within the new charge provided they met a ‘genuine diversity of ownership’ test, which would prevent non-UK resident individuals avoiding the charge by routing their property investment through narrowly held collective investment vehicles.

On 31 July 2014, the government announced its decision that widely held companies should be treated in the same way. Changes will also be made to accommodate arrangements where institutional investors use partnerships as part of the investment structure.

n Collection of tax

Inevitably, there will need to be a process for the reporting and payment of CGT by non-residents who dispose of UK residential property. The government indicated that its preference was for a form of withholding tax, operating alongside an option to self-report the tax due.

Depending on its design, this could impose an enormous burden on conveyancers. Particular questions arise as to how the residence status of clients is to be established, given that subsequent events in the same tax year may affect that status.

The government held out the ATED regime is intended to deter individuals from ‘enveloping’ residential property in companies. The new charge could work in precisely the opposite direction, giving an incentive to non-residents to hold property via companies so that no CGT charge arises on the sale of the shares.

Against this, however, there will be an SDLT charge of up to 15 per cent on transfer of the property to a company, and the purchaser of a company will normally require reassurance that
its history does not give rise to any unforeseen liabilities.

Individuals who have already ‘de-enveloped’ to avoid the ATED charge may well feel aggrieved at the lack of a consistent policy. SJ

Steve Wheeler is a partner at Moore Stephens