UK: Non UK resident individuals
owning UK residential property - new capital gains tax charges from 6 April
New capital gains tax charges from 6 April 2015
The Government announced plans in the March 2014 Budget to introduce capital gains tax (CGT) on the sale of UK residential property by non-UK residents with effect from 6 April 2015. More details of how this legislation will apply should be available later this year, possibly when the draft Finance Bill clauses are published on 10 December 2014.
At this stage there are a lot of areas that are, as yet, undecided and so it is very difficult to give any definitive advice. However the points set out below should be noted.
The initial comments from the Government were that only gains accruing after 6 April 2015 would be taxed and so it was expected that a there would be a 'rebasing' at that date for CGT purposes. However this now appears far from certain and some other method of working out gains accruing post 6 April 2015 may be used, for example pro rating the total gain over the whole period of ownership and taxing the proportion relating to the period post 6 April 2015. There is therefore a risk that earlier gains may effectively be taxed when properties are sold on or after 6 April 2015.
The charge is likely to apply to any UK residential (but not commercial) property, whether occupied by the owner or let out to third parties.
It may be possible to claim only or main residence (OMR) relief because the UK property is (or was) the owner's main residence at some stage. However the ability to make elections as to which of two or more properties is the 'main' residence for tax purposes is also the subject of consultation and may be restricted.
Where OMR relief is available, the relief for the final period of ownership has been reduced from 36 months to 18 months for sales where contracts are exchanged after 6 April 2014.
If any gain is taxable, the rate of CGT is likely to be at 18% or 28% depending on the level of UK income in the tax year of sale.
The Government indicated it intends that the CGT annual exempt amount will also be available to non-resident individuals subject to UK capital gains tax. The current annual exempt amount for individuals is £11,000.
Almost all Double Taxation Agreements (DTA) with the UK allow for such tax to be charged but credit should be available for this UK tax against any foreign tax payable on the sale.
Note that there is a separate consultation as to whether a UK income tax personal allowance (£10,000 for 2014/15) will continue to be available to many non-UK residents under UK legislation. For individuals letting UK property this could increase their UK tax payable, albeit that this should be available as a credit against any foreign tax payable. Where the right to such an allowance arises under a DTA with the UK, this should continue to be available.
Given the current uncertainty, if a non-resident individual wishes to gift or sell a UK residential property in the near future, they may wish to consider seeking to exchange contracts prior to the new rules coming in, as expected, on 6 April 2015.
Advice should however also be taken in the individual's country of residence to ascertain how such a sale will be taxed under local tax legislation and any available tax reliefs under double taxation agreements.
There are existing anti-avoidance rules which mean that if an asset (which was owned before the individual left the UK) is sold whilst they are non UK resident and they return to the UK within (broadly) 5 years of departure, then the gain will be taxable on their return to the UK. Future plans as to residence in the UK may therefore also need considering.
Complex new rules to decide whether someone is resident in the UK came into force on 6 April 2013 so the individual's residence status should be carefully considered. The new Statutory Residence Test (SRT) is a prescriptive test to ascertain whether someone is UK resident or not. Residence applies for a complete tax year although it is possible to 'split' the tax year in some cases such that gains in the 'overseas' part may be non-taxable in the UK if not caught by the 5 year rule mentioned above.
Section 240A of the Tax Administration Act, 2011 (as amended) requires that all tax practitioners register with a recognized controlling body before 1 July 2013. It is a criminal offense to not register with both a recognized controlling body and SARS.