UK: Non-UK Resident Owners Of UK Residential Property

A new Capital Gains Tax (CGT) charge has been introduced which will affect any gains made by non-UK residents disposing of UK residential property.

The charge was introduced to tackle a perceived unfairness in the tax system by addressing the imbalance between the treatment of UK residents and non-UK residents disposing of UK residential property. This charge came into effect on 6 April 2015 and becomes applicable on any gains arising after that date from the disposal of a qualifying property, meaning it would be advisable to record the condition of any relevant property and unusual features now to assist with any valuation later on.

Who is affected?

The new charge applies to non-UK resident individuals, partners, trustees, personal representatives and foundations. The charge will also apply to certain non-UK resident companies if they are 'closelyheld' (broadly, one which is under the control of five or fewer shareholders or participators).

Parties who fall outside the rules include pension funds, shareholders of property-owning companies and Real Estate Investment Trusts (REITs).

What properties does the charge apply to?

The tax charge applies to the disposal of a 'UK residential property interest' either used, or suitable for use, as a dwelling. The legislation defines what counts as a UK residential property interest.

There is no 'de minimis' threshold, meaning qualifying properties of any value can potentially be affected. This includes property(ies) being built or converted for residential use, although building land is outside the scope of the charge until actual construction commences.

Certain forms of communal residential property fall outside the scope of the charge; the main exceptions being hotels, care homes, nursing homes, hospices, boarding schools, army barracks and purpose-built student accommodation.

How is the charge calculated?

The new charge only taxes gains arising on or after 6 April 2015.

There are three ways of calculating the gain. As a property owner, we can help you decide which of the following methods to use:

1. The default position is that the non-UK resident taxpayer is treated as having rebased the cost of the property to its market value as at 5 April 2015. The increase in value from that date produces the taxable gain.
2. The taxpayer may make an election for the chargeable gain to be calculated on a time-apportionment basis, taking into account the whole period of ownership.
3. Alternatively, the taxpayer can elect to compute their gain over the whole period of ownership (ie. including the period before 6 April 2015), if that would be preferable. This option is only likely to be relevant when there is a loss at the point of rebasing.

Non-UK resident individuals are entitled to deduct the CGT annual exempt amount in arriving at their gains. Non-UK resident companies are eligible for indexation relief.

If you have lived overseas but move to the UK before your property is sold, no rebasing can be made and it will be subject to CGT in the normal way, ie. UK residents are unaffected by the changes.

If your property has been used as a dwelling and for other purposes (ie. 'mixed use'), appropriate apportionment provisions apply.

Rates of CGT

The new charge utilises existing CGT rates, which currently stand at 18% and 28% for individuals and 20% for companies respectively. However, if the property is subject to the Annual Tax on Enveloped Dwellings (ATED) regime, the company rate will be 28%.

Losses

There are special rules for losses which arise on the disposal of residential property. Losses will generally be ring-fenced and can only be used to offset gains on other UK residential properties arising in the same or future tax years.

Notifying HMRC and paying the tax

If you are a non-UK resident vendor you must submit a Non-Resident Capital Gains Tax (NRCGT) return to HMRC, within 30 days of the property transaction being completed. You will usually have to report the gain AND pay the tax charge at the same time. Any amendments to the return are allowed within 12 months of the filing date.

All disposals must be reported to HMRC irrespective of whether there is a tax liability. Your return must include an 'advance self-assessment' of the amount liable for the tax year in question.

If you are a non-UK resident already within the self-assessment system, you will have to report the disposal both on the NRCGT return and again on the self-assessment tax return, but payment of the tax can be postponed until the normal self-assessment payment date.

Principal Private Residence Relief

The UK Government was concerned that a non-UK resident could make an election for their UK property to be their main residence and thereby avoid a CGT charge by virtue of Principal Private Residence (PPR) relief. Therefore, the Government introduced new legislation to ensure that a residence will only be eligible for PPR relief for a tax year if the person making the disposal is either tax resident in the UK or has spent at least 90 days in that property in the tax year. Previous periods of occupation as an elected or actual main residence before April 2015 can be taken into account on a future disposal by a non-UK resident.

As a non-UK resident, what do I need to do?

There is no requirement for a 6 April 2015 valuation until the property disposal takes place. This can be carried out by a valuer when the property is sold, even if that is some years after April 2015.

By way of general advice, it would seem sensible to record, as at 6 April 2015, what condition the property is in and any unusual features, as this will assist with any valuation later on.

Affected non-UK residents are advised to arrange a '6 April 2015 valuation' in any event, while the evidence is readily available. Dated photographs would assist in this process.

Whether you are a UK or non-UK resident we can address any concerns you may have regarding the new CGT charge. Please contact your usual UHY adviser for further advice.