Non-resident owners of UK homes can seek relief from new CGT charge

Monday, 01 December 2014
The UK government has published the final version of its plans to impose capital gains tax (CGT) on disposals of UK property by non-resident individuals, trustees, estates and close companies, starting in April 2015.

This measure was first announced a year ago in the UK Chancellor of the Exchequer’s 2013 Autumn Statement and was followed by a consultation in April this year. Historically, non-resident individuals, companies and trusts have not paid CGT on investment gains from UK residential properties.

All valuations will be rebased to April 2015, when the new policy comes into force. Thus the CGT charge on disposal – which will be set at the usual 28 per cent – will be limited to capital gains that have accrued after that date. Alternatively the taxpayer can choose to either apportion the gain over the whole period of ownership or elect for the entire gain to be calculated in the usual way with no reference to rebasing or time apportionment.

Non-resident individual owners will also be able to claim the usual UK annual exemption from capital gains tax.

A key point that has only now been decided is that non-resident owners of homes in the UK will be entitled to the same CGT reliefs and exemptions as UK taxpayers. In particular, they can claim 100 per cent CGT relief on their UK home if it is their main residence – the so-called principal private residence (PPR) exemption.

However, an extra restriction has been introduced on the PPR exemption. In the past, a UK taxpayer who lived in more than one home was free to elect which was to be the main residence for PPR purposes. In future, however, HM Revenue and Customs will not accept that a UK home can be a non-resident’s main residence for CGT purposes for a tax year unless they have resided in the property for at least 90 midnights in that year. The same rule will apply in reverse to UK-resident owners of second homes in other countries.

Access to PPR will also be available for trusts if the beneficiary is non-UK resident on the same basis. Trustees will be taxed at 28 per cent, with a maximum of half the individual’s annual exemption.

Another important issue now settled is how the newly extended CGT will interact with the 28 per cent disposal charges already applied to property that is subject to the annual tax on enveloped dwellings (ATED). The policy decided upon by the Treasury is that, where part of the gain could be subject to both ATED-related CGT and the new CGT charge, the ATED-related CGT charge will take precedence. Any part of the gain that is not subject to ATED-related CGT will be subject to the new extended CGT.

Institutional investors will be excluded from the charge, provided they are ‘diversely held’ and not a mere vehicle used by private individuals to avoid the new tax. This distinction will be enforced by the introduction of a ‘narrowly controlled company’ test (essentially that the company is controlled by more than five persons) and a ‘genuine diversity of ownership’ test. Companies that fail these tests will pay tax on the disposal at the normal corporation tax rate of 20 per cent, reduced by a limited indexation allowance. This measure is designed to deter individuals from transferring their interest in UK residential property to a non-resident company in order to escape the tax.

Draft legislation will be published in time to be included in the 2015 Finance Act.


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