UK: Non-UK Residents To Come Within UK Capital Gains On UK Residential Property

Last Updated: 8 April 2014
Article by Lyndsey L.M. West

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The Government has outlined how it envisages that its proposed new capital gains tax ("CGT") charge will apply to non-UK residents disposing of UK residential property. The ostensible aim of the new charge is to align the CGT treatment of UK resident and non- UK resident individuals, trustees and partners in partnerships owning UK residential property.

The new charge will complement the CGT charge applicable to so-called "ATED-related gains" which commenced on 6 April 2013 for UK and non-UK resident companies disposing of UK residential property (other than that managed for genuine commercial purposes, such as letting or development). However, whereas the ATED-related gains charge only applies to gains accruing on UK properties valued at over £2m on the relevant valuation date (or, after 1 April 2015, valued at over £1m or, on or after 1 April 2016, valued at over £500,000) the new CGT charge will have no minimum limit. It will thus apply on the disposal by non-UK residents of all UK residential properties, including those valued at £500,000 or below. According to the consultation it applies to gains "arising" from April 2015.

Whereas the ATED-related gains charge does not apply to UK residential property managed for commercial purposes (such as letting or development) the new CGT charge will apply in such situations.

The new charge will apply to disposals from April 2015. This briefing is based on the Government's consultation document published on 28 March 2014. Further detail will be available following the current consultation. Furthermore the proposals might be adjusted over the coming months and before implementation.

Effect of new CGT charge on non-UK resident individuals, trustees and offshore Funds

Extension of CGT to non-UK resident individuals represents a significant break from the previous territorial limitation of CGT to UK resident individuals. Furthermore, non-UK residents who hold UK residential property in partnership will be taxable under the new CGT regime to the extent that gains are attributable to them.

Non-UK resident trustees will also be liable for CGT on disposals of UK residential property. This contrasts with the current position in which the CGT charge, if payable at all, is in effect borne by the settlor and/or beneficiaries, depending on their residence and domicile status and whether they pay tax on the remittance basis.

Collective investment schemes in the form of offshore funds will be outside the scope of the new CGT charge provided they satisfy a so-called "genuine diversity of ownership" test (which appears to be aimed at identifying closely held structures).

Effect of the new charge on non-UK resident companies

As far as companies are concerned the overall effect of the proposed new CGT charge appears to be that

Companies (UK resident and non-UK resident) not carrying on genuine property business (property letting, property development etc) will be subject to the existing ATED-related gains charge at 28%, with a lower applicable limit which from 1 April 2016 will be £500,000 Unless they fall within the charge at 28% on ATED-related gains, non-UK resident companies which own UK residential properties (including non-UK resident companies carrying on a genuine property business such as letting, development etc) will be subject to the new CGT charge (with neither an upper nor a lower limit).

The scope of the new CGT charge will be very wide. Save where the ATED-related charge applies, the new CGT charge will apply to all non-UK resident companies with UK residential properties of whatever value and whether or not carrying on a property business.

Rate of tax

Non UK residential individuals will be subject to the new CGT charge on their UK residential property at a rate of 18% or 28%, depending on their total UK income and gains. This mirrors the tax rates currently applicable to UK resident individuals. The annual exempt amount of £10,900 will be available to non-UK resident individuals. The Government will confirm at a later date the rates of tax to apply to gains made by Non-UK resident companies and other non-resident entities on disposals of UK residential properties.

Principal private residence exemption

In order to prevent individuals from avoiding the new CGT charge by electing that their UK residential property is their principal private residence ("PPR") and therefore within the related exemption from CGT, the Government proposes to alter the way in which the PPR election works. Two possibilities are outlined in the consultation. First, a person making such an election would have to demonstrate that the property in question was in fact their main residence. The other option suggested by the Government is the introduction of a fixed rule according to which an individual's PPR might be, for example, the property in which that person has been present for most of any given tax year. In either case it would be difficult for non-UK residents to satisfy the test in practice so as to benefit from the PPR exemption.

Many details remain to be seen. For example, we would hope that the PPR exemption would be available for non-UK resident trustees of settlements whose beneficiaries occupy residential properties in the same way that it is available for UK resident trustees in similar circumstances, but the consultation paper makes no mention of this point. The consultation paper seems to indicate that the above indicated alterations to the PPR election would apply across the board and not just to non-UK residents. If that is the case, it would narrow the availability of the PPR exemption for UK resident individuals and would therefore represent a significant change to the way the exemption works.

Collection of the new CGT charge

The Government proposes that collection of the new CGT charge would be by way of a withholding tax. Solicitors, accountants and others would be responsible both for collecting the tax and for identifying the non-UK residence status of vendors.

Conclusion

From the CGT perspective, in many cases the new charge is likely to neutralise the decision for non-residents of whether to hold UK residential property through a company or direct in the name of an individual or trustees. If so then IHT might once more become a significant factor for clients in deciding how to structure the ownership of UK residential property.

The Government emphasises that introduction of a CGT charge on non-UK resident individuals (and certain other non-UK entities) on disposals of UK residential property aligns the UK with tax treatment applicable in numerous other jurisdictions (including the USA, Australia, Canada, France, Italy and Spain). However, the piecemeal way in which the new CGT charge has been introduced following hot on the heels of the so-called ATED-related gains charge, means that application of the new tax rules seems likely to be particularly complex.

Alteration to the PPR election would have the unexpected and unwelcome effect of restricting availability of the election to UK residents.

The Government's consultation will remain open until 20 June 2014. We are therefore unlikely to have any further detail on the proposed new charges until the autumn. It is possible that some non-UK residents will want to begin exploring possible planning options before then. However, in most cases no action should be taken until further detail becomes available.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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