Author: Helena Luckhurst
This article is taken from Helena Luckhurst’s blog The Wealth Lawyer UK
The UK Government has now confirmed that UK Capital Gains Tax (CGT) will be extended to residential property owning non UK residents (NR) from April 2015.
UK residential property only
The new, extended CGT will apply to UK residential property only and will include land that is part of the garden or grounds of a residential building. Property suitable for residential use will be affected, even if not actually being used as a residence.
Disposals of residential property in the process of being constructed or adapted for residential use will be within the charge, as will disposals ‘off plan’. Building land on which construction has not yet started will be excluded. Additional rules apply for demolitions.
If a change of use occurs while a property or land is under the same ownership, the gain will be calculated on a time apportionment basis to reflect periods of non residential status.
The extent to which communal residential accommodation, such as care homes and accommodation for students, would be brought into charge was unclear. The Government has now clarified that care homes and nursing homes will not be affected by the changes. A newly defined category of ‘purpose built student accommodation’ and residential accommodation for school pupils will also be outside the charge.
NR partnerships and trusts
Partnerships and non UK entities that are characterised as partnerships for English tax law purposes are treated as transparent for UK tax purposes. Gains will be apportioned to partners in the usual way, so gains attributed to the disposal of UK residential property will now be chargeable on the NR partners.
Personal representatives of non resident deceased individuals and NR trustees will also be within the new, extended charge but trustees may have the opportunity of claiming CGT Private Residence Relief (PRR) if a beneficiary occupies trust property as their main residence and other conditions are satisfied. The extended CGT charge will take precedence over the existing system of attribution of gains to UK resident settlors and beneficiaries of NR trusts.
The Government has stated that it does not wish to disincentivise institutional investors into the UK property market. Accordingly, in addition to using a genuine diversity of ownership test, to keep collective investment schemes out of the new charge, there will be a new ‘narrowly controlled company’ test; effectively a modified version of the existing close company test. In essence, NR companies owned or controlled by five or fewer individuals or companies, which are themselves narrowly controlled and are not institutional investors, will be subject to CGT. Layers of companies will be looked through. The extended CGT charge will also take precedence over attribution of company gains to UK resident members of NR companies under existing rules.
Extended CGT will not apply if companies dispose of residential property held as trading stock.
Interaction with ATED-CGT and rates
The interaction between the CGT charge associated with the Annual Tax on Enveloped Dwellings (ATED-CGT) and the new rules is a significant issue. The intention is that NR companies not carrying on a genuine property business will be subject to ATED-CGT, currently payable at 28%, which will be applied in priority if there is dual liability. All other NR companies (including companies qualifying for an ATED relief) will pay the extended CGT charge which the Government wishes to set at the same rate as UK Corporation Tax (currently 20% in tax year 2014/2015 for some companies). In addition, some measure of indexation allowance (to combat the effect of inflation) and an option for groups of companies to benefit from a form of pooling will be available. Further guidance on the interaction is to be provided in due course.
Under the new rules, there is no equivalent to the ATED reliefs and no minimum threshold value for the property before the new charge can apply.
NR individuals will pay at either 18% or 28%, depending upon UK source income and any other UK chargeable gains in the applicable tax year. NR trustees will pay at 28%.
Default rebasing will apply so that only gain realised over the 6 April 2015 market value of the property will be subject to the charge. However, an opt-in time apportionment basis of calculation or a detailed calculation applying usual CGT principles will be available also.
The process is only stated in outline. For all NRs, HMRC will need to be notified of the disposal within 30 days of completion of the conveyance, whether or not any tax is due. At this point, any PRR is claimed. NRs with a ‘live’ self-assessment record with HMRC will be able to submit their UK tax return and pay any CGT due within the usual self-assessment timescales. NRs who are not within the self-assessment system will have to submit a return and pay any CGT due within 30 days of disposal. Further information and guidance to follow in due course.
NR individuals who occupy a UK residential property as their main residence will not have to pay CGT on its disposal. However, to constitute a main residence capable of eligibility for PRR, the NR individual must spend at least 90 midnights in the residence in the tax year before PRR can be claimed for that tax year. A claim for PRR for any given tax year must be made as part of the initial 30 day notification following disposal.
This is a summary of the key points in HM Treasury’s ‘Implementing a capital gains tax charge on non-residents: summary of responses’, published on 27 November 2014 in response to the Government’s 28 March 2014 consultation paper. More details of how the new system will work will become available with the publication of the enacting legislation in the draft Finance Bill 2015, which is expected later on this month.
Helena Luckhurst, Partner, Fladgate LLP (firstname.lastname@example.org)