At present, non-residents are not generally subject to UK Capital Gains Tax (CGT). The two main exceptions are non-residents trading in the UK through a UK branch, or “non-natural persons” (mainly companies) holding “expensive” residential properties in the UK within the ATED regime (of which, more later).
From 6 April 2015, all non-UK residents will be subject to CGT on gains on disposing of UK residential property, with the exception only of certain classes of communal property such as care homes, children’s homes or purpose-built student accommodations. However, the charge will not apply to institutional investors or companies and other entities such as collective investment funds where there is genuine wide ownership. The charge is targeted at ownership of UK residential property by individuals and privately owned companies.
Unlike the ATED regime, the charge will cover both residential properties used by the owners as a home and rented out as an investment. Where the property is owned by a company and used by the owners as a home, the ATED regime will normally apply in priority to the new charge. In fact, we now have the entirely unsatisfactory position that there will be two CGT regimes potentially affecting residential property in the UK, with no congruence between the regimes as to which properties are caught; which owners are caught; what reliefs are available; what rate of tax is payable; or the mechanics of collection!
Tax rates will broadly mirror those for UK residents, with individuals and trusts taxed at up to 28%, and companies (which will still get indexation allowance) at 20%. Tax will be levied only on the part of the gain arising after 6 April 2015: the taxpayer will be able to choose either to apportion the gain on a time basis or to treat the property as having been acquired on 6 April 2015 at its market value on that date. If you are affected by the proposed changes, it is worth considering the value of the property at April 2015, as this could be more difficult to do when the property comes to be sold.
Our advice to clients potentially affected is to consider obtaining, if not a formal valuation, then at least some contemporary evidence of the market value as at 6 April 2015 rather than leaving it until the property is disposed of, possibly many years hence.
The precise mechanism for collecting the tax is still under consideration, but initial proposals to require professionals such as solicitors acting for a non-resident to withhold and account for tax seem to have been shelved.
To avoid non-residents side-stepping the charge by designating their UK property as a tax-exempt “main residence” the rules on “main residence” elections (whereby a taxpayer with more than one home can choose which qualifies for exemption from CGT) are to be changed. A non-resident will be unable to designate a UK property for a tax year unless he spends at least 90 days in it in the year. And (presumably to comply with EU non-discrimination law) the same restriction will apply to a UK resident owning a second home in another country: only properties in which he spends at least 90 days in a tax year will be eligible. UK residents owning property only in the UK are unaffected.
At the same time, the threshold for the ATED regime (dealing with residential properties owned by “non-natural persons”) is to be reduced from £2m to £1m from 6 April 2015 (and to £500,000 from 6 April 2016) and the rates are to be substantially extended to cover residential properties worth more than £500,000 rather than the current £2m. For full details on the revised ATED regime click here; for a more detailed briefing on the extended CGT regime click here; and please get in touch with your usual BKL contact with any specific queries.