Previously only UK resident individuals were liable to UK Capital Gains Tax with a few notable exceptions. However, with effect from 6 April 2015, the charge to UK Capital Gains Tax has been extended to include non UK residents disposing of UK residential property.

The change was brought about to address a perceived imbalance in the treatment between UK and non UK residents given that UK residents were taxed on the disposal of UK residential properties which were not their main home but non UK residents were not. Furthermore, the government sought to bring the UK in line with other countries where gains are taxed in the country where the property is located.

What has changed?

From 6 April 2015 non UK residents who own UK residential property will be within the charge to UK Capital Gains Tax on the sale of property where that property is not their main residence.

Further changes have also been introduced to reduce the ability of non UK residents to elect for a UK property to be their main residence for Capital Gains Tax purposes and thus potentially claim Principal Private Residence relief.

Who do the changes apply to?

UK Capital Gains Tax will now apply to the following non-residents who dispose of UK residential property:

• Non-resident individuals
• Non-resident trustees
• Personal representatives of non UK residents who have died
• Non-resident partners of partnerships
• Closely held non-resident companies.

A closely held company for these purposes is a company which is under the control of five or fewer participators.

What does residential property include?

The new charge applies to the disposal of UK property which is suitable for use as a dwelling. That includes a place that currently is used as a residence or which has the potential to be used as a residence. For example, it is in the process of being constructed or adapted for use as a dwelling. This also applies to properties acquired “off plan” before construction commences. There are some exceptions from the charge such as nursing homes, hospitals and purpose built student accommodation. Furthermore, the charge does not apply to UK commercial property.

What do the changes apply to?

The changes will apply to all gains relating to periods after 6 April 2015. There are three options available to calculate the gains arising. These are as follows:

1. Rebase the cost of the property to the market value at 6 April 2015
2. Time apportion the gain on a straight line basis over the period of ownership
3. Compute the gain/loss over the entire period of ownership.

HM Revenue & Customs standard approach will be to rebase the value to 6 April 2015, however, the taxpayer can elect for any of the methods to apply. Clearly the method which produces the lowest gain will best be chosen.

What about the treatment of losses?

Should a loss arise, the loss will be ring fenced against gains arising on the sale of UK residential property either in the same tax year or carried forward to future tax years.

Should someone’s residence position change to UK resident, any unused losses will be able to be used against all other chargeable gains. Conversely, if someone becomes non UK resident, any unused losses from the sale of UK residential property will be restricted and will only be available for offset against future UK residential property gains.

Principal Private Residence Relief

Principal Private Residence relief is currently available to exempt a gain from Capital Gains Tax where the individual disposes of their main or principal residence. To ensure that non UK residents do not elect for a UK property to be their main residence for the sole purpose of avoiding a charge to UK tax under this new legislation, changes have been introduced to the Principal Private Residence Rules. These rules also apply to UK resident individuals disposing of a property situated abroad.

To claim the relief individuals will need to either:

• Be tax resident in the country where the property is located for that tax year (i.e. non UK residents will need to live in the UK for the year) or
• Have spent at least 90 days in the property in that tax year – the “90 day” rule. Should the individual own more than one property in the UK, the period of time spent in any of those properties can be aggregated to meet the 90 day rule. However, only one property can be nominated as the main residence.

No other changes have been introduced with respect to this relief in terms of the rules surrounding absence from the property and lettings relief. These rules will still continue to apply.

If the 90 day rule is not met, the individual will be regarded as absent from the property for the whole of that tax year.

Rate of Tax

Capital Gains Tax will be payable at the same rate as currently applies to UK residents.

Individuals who are basic rate taxpayers will be liable at 18% whereas higher rate or additional rate taxpayers will be taxable at 28%. Consideration will be given to the individual’s UK income and gains in that year in determining the rate which applies. Individuals will also be able to avail of the Annual Exemption which is currently £11,100 per person for the 2015/16 tax year.

Trustees will be liable to tax at 28% and will be able to avail of half the Annual Exemption applicable to individuals (i.e. £5,550 for the 2015/16 tax year).

Companies will be liable to corporation tax at 20% and will be able to avail of limited indexation relief.

Payment and Reporting

All property disposals have to be notified to HM Revenue & Customs within 30 days of the conveyance of the property even if a loss arises or the gain is covered by the Annual Exemption. HM Revenue & Customs will then provide the person with details of how to make the relevant tax payment. Where the person is registered for self-assessment, the gain should also be disclosed on the individual’s tax return and payment is due by the normal payment dates.

Annual Tax on Enveloped Dwellings

The sale of a property can also potentially fall within the charge to Annual Tax on Enveloped Dwellings (“ATED”). This anti-avoidance measure was introduced in April 2013 to discourage individuals from buying residential property though a company or other vehicles in order to reduce the charge to Stamp Duty Land Tax where the property was being used by a connected person as their home. It applies where the property is valued in excess of £1m, falling to £500,000 from 1 April 2016.

Where the charge applies, the ATED related Capital Gains Tax takes precedence over the non-resident Capital Gains Tax charge. ATED related capital gains are liable to tax at 28% for any property caught by these rules. Any remaining gains relating to the period post April 2015 will be subject to the non-resident Capital Gains Tax charge at 20%.

Conclusion

The introduction of the new rules, will make it increasingly more difficult for non-residents to avoid a charge to UK Capital Gains Tax on the sale of a property. However, depending on their country of residence, it may be possible to obtain Double Tax Relief on any foreign tax paid on the disposal.

The changes to the Principal Private Residence Relief rules make it harder for individuals to claim the relief without becoming UK resident. However, given the introduction of the 90 day rule, it is still a possibility. Should you be considering this it will be imperative that this rule is considered in conjunction with the Statutory Residence Test in order to avoid becoming UK resident.

Leona Leonard is Tax Manager with Cavanagh Kelly.

Email: Leona.Leonard@cavanaghkelly.com

Tele: 028 8775 2990