UK: CGT on UK residential property to be extended to non-UK resident investors
11 July 2014
Posted by: Author: Ashley Hill
Author: Ashley Hill (BDO)
In September 2013, the Government announced that it would extend UK capital gains tax to gains made by non-UK residents disposing of UK residential property from April 2015. A consultation document issued in March 2014 sets out how the Government proposes the CGT charge should be applied.
The Government has expressed the view that it is unfair that UK resident investors are subject to UK tax on their UK residential property investments whilst non-UK residents are generally not. Its objectives in extending the charge are for "fairness”, "sustainability” and "simplicity”. Currently, non-UK residents are only chargeable to UK tax on their gains where they hold an asset used within a UK permanent establishment or on certain high value residential properties held by certain entities liable to the Annual Tax on Enveloped Dwellings charge.
From April 2015, certain non-UK resident investors will be subject to CGT on gains arising from UK residential property after that date.
What is meant by residential property?
The extended CGT charge is intended to focus on property used or suitable for use as a dwelling, i.e. a place that is used as a residence, or has the potential to be so used. Unlike the annual tax on enveloped dwellings (ATED), the tax charge will also apply to properties which are part of an investment business, such as property rental businesses.
However, the charge will not apply to:
––Some accommodation for children and students, such as boarding schools and halls of residence;
––Accommodation to provide care, such as nursing homes for the elderly or disabled;
––Other communal accommodation, such as those for use by the armed forces, prisons and similar establishments.
The Government is looking at which types of non-resident entity should be subject to the charge, as well as individuals. The consultation document proposes the following:
––Non-UK resident companies – unlike the current CGT charge on certain high value residential properties, the Government proposes taxing gains on all residential properties regardless of their value. UK companies are currently subject to tax on gains at a lower rate than individuals and are
also able to claim indexation allowance. It is, therefore, proposed to introduce a tailored approach for non-UK resident companies.
––Partnerships – partners should be taxed on the gains attributed to them.
––Trusts – non-UK resident trustees (of all types of trust) should be subject to CGT on the gains made on UK residential property disposals.
––Offshore funds – the charge is not intended to apply to the disposal of shares or units in funds. However, for anti-avoidance reasons, consideration will be given to introducing a charge at the fund level unless the fund meets the genuine diversity of ownership (GDO) test. The GDO test is expected to ensure that most collective investment schemes are excluded from the charge. A further test to exclude funds where the vast majority of their portfolios are commercial properties will also be considered.
––Pension funds – will be excluded from the charge.
––UK real estate investment trusts (REITs) – non-UK resident investors in UK REITs will not be affected by the new charge.
––Foreign REITs – these will not be subject to the charge where they are equivalent to UK REITs.
Private residence relief
Principal private residence relief is intended to provide relief from CGT where an individual disposes of his or her main residence. It is considered that a non-UK resident may genuinely have a UK property which has been his or her main residence, for example where a person emigrates from the UK and then sells his or her UK home.
Where an individual has more than one residence, he or she can nominate one of these to be treated as his or her main residence. The Government considers that non-UK residents may use this mechanism for tax avoidance purposes and is, therefore, considering the following:
––Removing the ability for a person to make the election. Whether a UK property is demonstrably the person’s main residence will then be decided under first principles; or
––Introducing a rule that identifies a person’s main residence, such as the place in which the person has been present most for any given tax year.
This change would also apply to UK residents, with potentially significant implications for many people who own two homes.
Rate of tax
In calculating the rate of tax, it is intended that the annual exempt amount (currently GBP 11,000) will be available to non-resident individuals. The rates of tax above this will be 18% or 28% depending on the level of the individual’s total income and gains in the year of the disposal.
The rate of tax to apply to gains made by other non-UK resident entities (companies, funds, etc.) will be confirmed at a later date.
The Government will also ensure that there is a mechanism for claiming losses.
The current self-assessment process relies on voluntary reporting and payment. The Government’s preference is, therefore, to introduce a form of withholding tax that operates alongside an option to self-report the tax due. Where a non-UK resident seller has been identified:
––The seller would be given the option to pay either the withholding tax or the actual liability
––The money would be transferred
––A return would be submitted at a later date to allow for any differences to be settled. The Government believes that this process will be similar to the existing stamp duty land tax (SDLT) process with agents transferring monies due within 30 days.
Other changes – SDLT
Since 20 March 2014, the 15% SDLT rate has been extended to certain transactions with consideration above GBP 500,000 (formerly GBP 2 m). This applies to acquisitions by companies, collective investment schemes or partnerships with a corporate partner. Certain reliefs are available (e.g. for commercially let property).
Other changes – ATED
From April 2015, a new ATED band for properties with values between GBP 1 m and GBP 2 m will be subject to an annual charge of GBP 7,000. It is also proposed that from April 2016 an additional new ATED band for properties with values between GBP 500,000 and GBP 1 m will be subject to an annual charge of GBP 3,500. ATED applies only to residential properties held by companies, collective investment schemes or partnerships with a corporate partner. Certain reliefs are available (e.g. for commercially let property).
The proposed changes would significantly alter the way non-UK resident investors are taxed on their capital gains, with a knock-on effect for some UK residents. Responses to the consultation are requested by 20 June 2014, with the new rules due to be implemented in April 2015. No fundamental changes to these proposals are expected, so non-UK resident investors should now consider how best to hold UK residential properties in future, and UK residents with more than one residential property should consider whether any action is required in advance of the proposed changes.
This article first appeared on bdo.co.za.