Has Property Lost its Christmas Cheer?
Published: 12 December 2014
At Christmas, Capital Gains Tax might be the last thing on your mind, but if you are non resident and own property in the UK, you might want to think again. According to the Chancellor George Osborne: "It is not right that those who live in this country pay Capital Gains Tax when they sell a home that is not their main residence, but those who don’t live here, do not.That is unfair, so from April 2015 we will introduce Capital Gains Tax on future gains made by non-residents who sell residential property here in the UK."
The above announcement was made in December 2013 and Government has now published detailed proposals for its plans to implement Capital Gains Tax ("CGT") charges which will subject non-UK residents to CGT on the disposals of residential property in the UK.
The Government's aim with the extended CGT charge is to remove the differences in treatment of UK and non-UK residents selling residential property. This will bring the UK into line with many other countries (where CGT is charged on the basis of location of the property).
Commentators state that the UK property market might be affected by the new regulations, creating a rush to sell properties before the new rules come into effect, pushing up the supply of available London properties in the early part of next year.
The new tax charge will take effect from April 2015 and will apply to all residential property, irrespective of value. This distinguishes the new charge from the existing Annual Tax on Enveloped Dwellings ("ATED")-related CGT charge, which includes residential property used for letting purposes and limits the charge to properties for which the consideration for disposal exceeds a specified "threshold amount." This is currently £2 million and is due to decrease to £1 million from 6 April 2015 for gains which accrue after that date.
The government has confirmed that it is only gains from 6 April 2015 that will be taxed, and that, in most cases, it will allow either rebasing to 5 April 2015 or a time-apportionment of the whole gain.
Non-resident individuals and trustees will be taxed at 18% or 28% (depending on their level of income/gains) as with CGT for UK resident individuals. Companies which are caught by the charge will be taxed at 20% (being the main rate of corporation tax from 1 April 2015).
As well as affecting private individuals, the new CGT charge could also affect non-resident businesses (i.e. companies, partnerships with non-UK resident entities, and trusts) which hold let residential property (including some developers who build to let).
The new tax charge will not apply to non-resident traders in UK property (i.e. those who buy or develop properties to sell). Such traders may already be within the scope of UK income tax or corporation tax, however. Communal residential property (such as care homes, nursing homes, purpose-built student accommodation and those for school children) will generally be excluded from this new tax charge.
The charge will apply to gains made by individuals, trustees, closely held non-resident companies and funds (to the extent that such gains are not caught by the ATED-related CGT charge). Companies and funds which are not closely held will not be caught and neither will most institutional investors. Where a non-UK resident falls within both regimes, the ATED-related CGT charge (currently at 28%) will apply first and any remaining part of the gain will fall to be taxed under the new tax charge.
For companies caught the rate charged is due to reflect the main UK corporate tax rate, which will be 20% from April 2015, a form of indexation and a limited form of pooling for groups. However, the ATED-related gains regime is to stay in place. So some companies owning residential properties may find they move in and out of one regime or the other, although ATED-related charges will take precedence to prevent double taxation.
Principal private residence relief ("PPR") will be available. However, there will be a new rule for PPR, applicable both to non-UK residents in relation to residential property in the UK and UK residents in relation to property overseas.
The Government has decided that from April 2015 a person’s residence will not be eligible for PPR for a tax year unless:
- either the person making the disposal was tax resident in the same country as the property for that tax year; or
- not tax resident in a country, the person spent at least 90 midnights ("90-day rule") in that property (or across all of their properties in that country) in that tax year
However, due to the tightening of the rules for electing which property qualifies for PPR, non-residents who own a UK property or UK residents who own an overseas property may now find they are liable to pay CGT on the eventual disposal. Non-residents are required to give notification at the date of disposal, whereas UK residents must notify which of their residences qualifies for PRR within two years of a change in the number of residences.
The 90-day rule will be crucial in determining the tax position and will particularly affect those resident outside the UK who have a home in the UK. Where they spend more than 90 days in that property (or all their UK properties taken together) they could nominate which property benefits from PPR. This recognises those who have a significant presence in the UK.
The government’s proposals confirm that non-residents investing into UK residential property through UK Real Estate Investment Trusts ("REITs") will not be affected by the new tax charge and that foreign REITs will not be subject to the new charge where they are 'equivalent to' UK REITs.
To ensure that the new tax charge is targeted at individuals and companies that are the private investment vehicles of small groups of individuals/families, there will be exclusions from the charge for non-resident institutional investors, widely held funds and widely held companies. To be eligible for this exclusion, the non-resident disposing of the property will have to show either that:
- it is not a "narrowly controlled company" based on "close company" test (control by five or fewer persons) with interests of connected people such as family members aggregated but members of a partnership will not be treated as connected; or
- in the case of a fund, it meets a "genuine diversity of ownership" test based on the existing 'genuine diversity of ownership' (GDO) test that exists for Authorised Investment Funds
We do not yet have draft legislation for these tests and it will be necessary to wait until we do to ascertain whether, for example, a fund, the majority share of which is held by an ultra-high net worth individual, may be caught by the tax charge.
For an individual wishing to invest in UK residential property generally rather than in any specific property, investing in a UK REIT or foreign REIT-equivalent, or other diversely held fund or non-resident company investing in property, may be an alternative tax-efficient option.
For non-UK resident individuals wishing to invest in a specific residential property for business purposes, it will generally be preferable to set up a non-resident company to make the investment because of the lower rate of corporation tax (20%) compared with CGT (28%).
The overall tax costs of holding a UK residential property for private use through a corporate envelope will continue to be greater than doing so directly to the extent that higher rate SDLT, ATED and (at least for individuals taxable at 18% under the new CGT charge) ATED-related CGT may apply to an enveloped property.
However, the distinction between the respective tax costs of acquiring and owning high-value residential property through a company rather than directly has been reduced with the increase in the top rates of SDLT.
The fact that CGT will potentially apply at rates of up to 28% to gains on any disposal of UK residential property by a non-resident individual or trustee after 6 April 2015 may further tip the balance back towards a corporate holding structure where there are other advantages to such a structure.
These might include the inheritance tax advantages of holding a property through an offshore company, possible privacy reasons and practical advantages, such as avoiding probate on the death of a property owner. Of course, careful consideration of all the relevant circumstances will be required to determine whether this may be the case.
Any non-UK resident who owns or is considering acquiring UK residential property, whether through a holding structure or otherwise, or is considering disposing of such a property, should consider reviewing the position before the new rules take effect, in order to determine the best way to proceed.
The contents of this article are intended for general information purposes only and shall not be deemed to be, or constitute legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article.