Details of UK plans for capital gains tax on non-residents' property disposals

Historically, non-resident individuals, companies and trusts have not paid CGT on investment gains from residential properties. However, things began to change last April, when the Annual Tax on Enveloped Dwellings (ATED) was introduced. At that point CGT became chargeable on personal-use residences (i.e. excluding lettings) worth more than GBP2 million if owned through a corporate envelope.

The consultation paper issued last week extends CGT on UK residential properties to all non-UK residents, whether individuals, partners, companies or trusts.

The proposed charge will be levied on all UK dwellings of any value, whether or not they are used as second homes or are rented out. The charge will come into effect in April 2015 and will apply only to gains arising from that date. The rate will be the same 28 per cent that is applied to most UK resident taxpayers. A special 'tailored charge' regime will be applied to corporate owners, the rate for which has not yet been announced.

The charge will be in addition to the existing ATED-related CGT charge for properties that are subject to the ATED. The interaction will inevitably be complex, as the ATED-related CGT charge can apply to part of a gain, says Withers.

No exemptions from the charge are being considered other than for communal use properties, such as student halls of residence and care homes. The 'genuine businesses' that were excluded from the ATED charge (such as property letting businesses) will not be exempt from the new CGT regime unless they are of genuinely diverse ownership.

'The government has made it clear that they see genuine business activity within the scope of the CGT charge, so the exemptions applying to ATED and stamp duty land tax for property rental businesses will not be available,' said John Christian of law firm Pinsent Masons. He suggested that funds for investment in UK residential lettings should be structured as a real estate investment trust or a diversely held fund.

The extension of CGT to foreigners poses a dilemma for Treasury in terms of principal private residence (PPR) relief. This exempts from CGT any gain in the value of a residence while it was being used as the owner's main residence. UK-resident taxpayers who own more than one home have in the past been able to nominate which home is to be treated as their main residence, which has brought them useful tax benefits.

The government intends to extend the PPR exemption to non-resident owners, but it fears that granting them the right of PPR nomination as well would allow them to avoid the new CGT charge too easily. So it is proposing to remove the right of PPR election from all homeowners, both non-resident and UK-resident. Instead the main residence would be determined either as a general question of fact, or defined as the residence in which the taxpayer spent most days in any given tax year. Both options would 'raise considerable difficulties in implementation and will give rise to difficult evidential considerations,' says Withers.

In any case, compliance with the new tax can only be assured by imposing new withholding taxes on the gross sales proceeds.

The consultation closes on 20 June 2014. Draft legislation will probably be published in the Autumn Statement next December.

• There is no proposal to extend CGT to non-UK residents holding commercial properties in the UK or other assets.

Sources

• HM Treasury (PDF file)