The Chancellor announced in his Autumn Statement of 5 December 2013 that Capital Gains Tax (CGT) would be extended to non-residents disposing of residential property. On 28 March 2014 HM Treasury and HMRC published a consultation document entitled “Implementing a Capital Gains Tax charge on non-residents”. The foreword to the consultation document by David Gauke, Exchequer Secretary to the Treasury states:
‘This consultation document outlines the proposed design for the extension of CGT to address the current imbalance between the treatment of UK and non-UK residents disposing of UK residential property. This measure will bring the UK into line with many other countries that already charge CGT on the basis of the location of the residential property rather than the location of the seller.
The Government recognises that this change is not straightforward to introduce. For this reason, the change will apply from April 2015, and only to gains arising from that date. We will ensure, as far as possible, that the extended CGT charge is fair and sustainable, without imposing unnecessary or intrusive burdens on non-residents’.
Summary of proposals
What is the basic proposal?
It is proposed that CGT be extended to non-residents disposing of UK residential property.
Who will the new CGT charge apply to?
It is proposed that the new CGT charge will extend to non-resident individuals, non-resident trustees, non-UK resident partners of partnerships, certain closely held fund structures and non-resident companies.
When will the new CGT charge apply from and on which gains?
The new rules will apply from April 2015 to gains which accrue post 5 April 2015. The consultation paper does not give any details of whether/how rebasing to 5 April 2015 may apply.
What is meant by residential property?
The Government intends to focus the extended CGT charge on property used or suitable for use as a dwelling i.e. a place that is, or has the potential to be, used as a residence. This will include a property in the process of being constructed or adapted for such use. The Government is not intending to change the tax treatment for property, such as office and industrial buildings, which cannot be used and are not in the course of being converted to a place to live.
Will let residential property owned individually by a non-resident be within the charge to CGT?
Yes, all let residential property owned individually by a non-resident will be within the charge to UK CGT from April 2015 whatever its value.
Will there be any exclusion from the CGT charge?
The Government has indicated that property which is primarily for communal use, such as boarding schools, nursing homes, halls of residence for students in further or higher education, should not be affected by the extension to CGT.
Also the Government does not propose to extend it to non-resident pension schemes, foreign Real Estate Investment Trusts (REITs) or to non-resident investors in UK REITs.
What are the proposals for non-resident companies in the light of the Annual Tax on Enveloped Dwellings (ATED) provisions?
ATED was introduced with effect from 1 April 2013 for companies holding residential property worth more than £2m. The legislation contains reliefs from ATED for commercial rental, property development and dealing. Where the property has been subject to an ATED charge then, on a sale of the property, CGT is payable on any gain attributable to the period that ATED was payable.
The Chancellor announced in the Spring Budget on 19 March 2014 the extension of ATED to companies owning residential property worth more than £1m from April 2015 and more than £500,000 from 1 April 2016. For these lower value properties, again CGT is payable for gains attributable to any ATED period from the start dates (i.e. 1 April 2015/1 April 2016).
The Government now proposes to extend CGT to all UK residential property sold by non-resident companies, so that all properties are within the scope of CGT including those valued below £500,000.
In terms of the charge to tax, the consultation document says
“The Government is minded to introduce a tailored approach within CGT or corporation tax to charge gains on disposals of residential property by non-resident companies. This approach would place a charge only on gains made on disposals of UK residential property by non-resident companies. If this approach is introduced, the Government intends to allow losses that non-resident companies incur on disposals of UK properties only.
In combination with the ATED – CGT charge this means that: corporate envelopes that are not genuine businesses disposing of UK residential property will be subject to the ATED- related CGT charge of 28%; and other companies disposing of UK residential property will be subject to the tailored charge. The Government will confirm the rate of tax charged on disposals of UK residential property by non-resident companies at a later date”.
Has the Government announced anything regarding Private Residence Relief (PRR)?
The consultation document contains a number of significant changes regarding private residence relief. Currently an individual with more than one residence can choose, for any given period, which of those properties they would like to qualify for PRR. This is done by making a PRR election and sending it to HMRC. CGT is then due on gains relating to other residences they own, irrespective of whether it is their main residence. The consultation paper at para 3.3 says:-
“Bringing non-residents into CGT without any changes could mean that non-residents invariably chose to nominate their UK residence as their main residence and obtain tax relief on gains made on that property, even where it was not in fact their main residence, yet not pay any UK CGT on gains relating to their other residences outside of the UK. This would undermine the extension of CGT to non-residents”.
The Government has put forward two options:-
(1) remove the ability for a person to elect, with the person’s PRR being that property which is demonstrably the person’s main residence. This would be determined by looking at all the evidence including such factors as where the UK taxpayer’s spouse and family live, where mail is sent, and registration on the electoral role; or
(2) replace the election with a fixed rule that identifies the person’s main residence based on where he/she is present for most time in a particular tax year.
What rate of CGT will be charged on non-residents selling UK residential property?
For non-resident individuals the rate of CGT will be the same as for residents: either 18% or 28% depending on whether the individual is or is not a higher rate taxpayer.
The annual CGT exemption will be available to non-resident individuals (£11,100 for 2015/16). Non-residents will need to declare their UK source income to determine the appropriate level of tax is charged.
As mentioned previously the Government has yet to decide the level of tax to be applied to companies and other entities.
How will CGT be collected?
The Government proposes a form of withholding tax on disposals of UK residential property by non UK residents with an option to pay the actual tax due. The proposal is that the collection of tax operates in a similar way to Stamp Duty Land Tax i.e. solicitors acting on the sale of UK residential property by a non resident would retain a sum equivalent to the CGT due, and transfer this to HMRC within 30 days of the transaction.
What next?The consultation closes on 20 June 2014 and legislation is expected to be included in the Finance Act 2015.
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