There are many implications of the Government’s intention to charge non-residents UK Capital Gains Tax, explains Kyra Motley at Taylor Wessing.
A key attraction for wealthy foreign investors in the UK has been their exemption from the UK’s Capital Gains Tax when they sell UK residential property. This attraction was eroded by the introduction of the Annual Tax on Enveloped Dwellings in April 2013 which, in broad terms, applies to residential property held by non-resident companies where the property is not used for commercial purposes (such as letting to a third party or for development). However, as announced in the 2013 Autumn Statement, the CGT regime will be extended to apply to gains made by all non-residents holding UK residential property from April 2015. On 27 November 2014 the Government announced further information on how these rules will apply in practice.
Those who could come within the scope of these new rules should take advice as soon as possible on how they may be affected.
Non-resident individuals, non-resident companies, non-resident trustees, personal representatives of the estate of a non-resident individual, and non-resident partners of partnerships will be affected. Certain investors are excluded from the scope of the charge, including non-resident companies held by a diverse number of institutional investors.
The changes will only affect UK residential property (even if commercially let) and not commercial property. In some cases they can also apply to “off plan” purchases (i.e. property which is in the process of being constructed). Certain types of communal accommodations are excluded such as nursing homes and some purpose-built student accommodation.
The new rules will only apply to increases in value of the property from 6 April 2015, therefore gains accrued prior to this date will not be within the scope of the new rules. Taxpayers will however have certain options to mitigate their UK tax exposure and advice should be sought in all cases.
We recommend that those affected obtain an accurate, up-to-date valuation of their property as at 6 April 2015.
CGT will be charged on any gain made and certain deductible expenses can be taken into account. The rates will be aligned with those paid by UK resident persons and entities. The rates will be:
Losses can be set against gains arising on the disposal of other residential property in the same tax year or can be carried forward. There are special rules which deal with “pooling arrangements” for groups of companies.
PPR will continue to be available for UK residents disposing of their home. If UK residents dispose of a property abroad then, subject to fulfilling the existing criteria for PPR, they will also need to meet the “90-day rule” (see below).
Non-resident individuals will need to meet the 90-day rule to claim PPR in relation to a particular year. In the case of non-resident trusts, in addition to the normal procedure and criteria, the beneficiary in question who is jointly electing with the trustee would also need to meet the 90-day rule.
The 90-day rule means that an individual must have spent at least 90 nights in the property for every year in which PPR is claimed (although there are specific rules dealing with situations where multiple properties are involved).
Individuals will need to manage this requirement carefully and consider if the 90-day rule may have an impact on their personal residence position in the UK.
If a property is already within the scope of the ATED regime then that will take priority over this new charge. Those already within ATED will therefore suffer the higher rates that can apply. For example, for a company within the ATED regime the rate of CGT would be 28% and not 20%. Companies which are currently exempt under the ATED regime, for example those let on a commercial basis, would still be caught by these new rules and 20% would be payable (providing they continue to be exempt under ATED).
The other existing anti-avoidance rules will continue to apply to gains made prior to 6 April 2015. Any gains not subject to tax under the new regime could still be subject to tax under the existing anti-avoidance rules. These rules can attribute gains made by non-resident companies to UK resident shareholders and they can also “match” gains realised or attributed to non-resident trusts to “benefits” received by UK resident beneficiaries or settlors (i.e. the person who established the trust).
Where these new rules apply, HMRC will need to be notified of the sale or disposal of the property within 30 days of completion and, if PPR is claimed, the nomination should be made in the same notification (unless a taxpayer has an existing relationship with HMRC, in which case they may be able to deal with the formalities in their self-assessment tax return).
The changes represent a dramatic departure from the basis on which non-residents have been subject to CGT in the past. Whilst relief from the charge may be available in the form of PPR, this will not relieve a large number of individuals and entities from the charge, particularly those who hold multiple residential properties in the UK for investment. There is also the Stamp Duty Land Tax overhaul announced earlier this week in the 2014 Autumn Statement to consider, along with the spectre of a “Mansion Tax” on high-value properties proposed by the Labour party. It is possible that these changes, coupled together, will affect the top end of the market as the tax-free benefit of investing in the market, particularly in London, will be partially eroded.
Those impacted by the changes should seek professional advice as soon as possible, particularly to confirm if relief will be available and to understand how any gains could be charged in the future.
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