Non UK resident property investors capital gains tax (residential property)

Author

Andy Wood

Andy is a practical, creative tax adviser who assists a variety of clients in achieving their personal and commercial objectives in the most tax efficient manner.

Non UK resident property investors capital gains tax (“NRCGT”)

Introduction – Non UK resident property investors capital gains tax

It was an enduring basic principle of UK CGT that it generally only applied to UK resident persons. This was regardless of whether that person was an individual, a body of Trustees or a Company.

There were, and are, some notable exceptions to this to prevent avoidance. For instance, there is the temporary non-resident rule for individuals and also specific anti-avoidance rules applying to Companies and Trusts serving UK resident masters.

In this regard,  a UK resident individual should always been resigned to paying CGT on gains above the annual exemption arising on the disposal of a UK property. The main safety net will be that if the property in question was his or her main residence then the sale might qualify for ‘main residence relief’ aka ‘Principal Private Residence’ relief.

For non-UK residence individuals, no such CGT charge would usually accrue unless anti-avoidance measures were engaged. Sitting pretty.

But wait a minute. Cue the UK’s newly discovered sense of tax egality striding to our rescue. It has been stated, unclear whether tongue was firmly in cheek or not, that the decision to break with the enduring principle and throw open the CGT net to non-residents was based on a sense of fairness. An alignment of the treatment of UK and non-UK residents was needed.

It was presented as the closure of a loophole – let’s not quibble over the fact that the existing law was quite clear, comprehensive and deliberate.

Initially this was, once again, purely aimed at the UK residential property. It always seemed that this would be the thin end of the wedge. Sure enough, the inevitable widening (further alignment?) was announced with an extension to commercial property in the Autumn Budget 2017. A formal consultation document was produced and the likelihood is that new rules will come in to effect from April 2019 onwards.

The opening salvo in respect of CGT

However, the first attack was the introduction of ATED-related CGT charge (see the earlier article on ATED).

Essentially, where a property was within the ATED regime (in other words, high value prop, held by a NNP) then a 28% charge (note the rate) on the gains will arise.

Second bite at the cherry – Non UK resident property investors capital gains tax

More wide-ranging measures were introduced with effect from 6 April 2015.

These new rules essentially extended the territorial scope of CGT to non-UK residents selling, or otherwise disposing, of UK residential property.

The charge only applied to any part of a gain that arose after this date so did not seek to tax gains retrospectively.

As such, a property bought many decades ago and sold on 16 February 2018 would find the gain sliced and diced between pre-April 2015 gains and post-April 2015 gains. Only the latter would be taxable.

The aim of the proposals is to ensure both UK and non-UK residents are subject to a comparable rate of tax on such gains.

Once again, this only considers a charge in respect of residential property and does not apply to commercial property or other assets. However, there is a consultation document proposing extending the charge to commercial property with effect from April 2019 at the earliest.

There are also other proposed changes including extending Non-resident CGT to shares in property rich companies – whether residential or commercial.

No requirement for the property to be ‘high value’

The rules apply to all residential property held by non-UK resident persons. There is no prerequisite for the property to be valued above any threshold for the rules to apply.

This differs to the ATED and SDLT rules set out in our other articles.

No reliefs for letting and / or development

You will remember that there were several useful reliefs available for both the SDLT 15% super rate and also for ATED. Usefully, these included commercially let properties and other activities.

However, it is important to note that these reliefs do not exist for this newly extended CGT charge.

Some exceptions – Non UK resident property investors capital gains tax

Where the Company holding the property is a ‘closely held company’ then an exemption may apply.

Similarly, there are also exemptions where the property is held by marketed funds and /or life assurance funds.

Where a disposal is made by a pension scheme then this should also be covered by the statutory exemption that applies to pension schemes. There are difficulties in UK registered pension schemes (and indeed QROPS) owning residential property however there is nothing to stop a scheme such as a QNUPS holding such property and it should be able to avail itself of this exemption assuming it is set up in a particular manner.

Interaction with ATED

As seen from the above, there are some important differences between the NRCGT charge and the ATED related CGT charges.

Of course, the eagle-eyed will note that where we are dealing with a non-UK Company or a non-resident trust holding the relevant property then both the NRCGT and ATED related CGT charge as well.

So, what happens here?

The position is that the ATED rules apply in priority to NRCGT. As such, there should be no double taxation in respect of the same gain.

Rebasing of the property value

As stated above, it is only the gain that relates to the period after 5 April 2015 that is subject to NRCGT.

As such, if you have not done so already, one should seek to establish the value of the property as of 5 April 2015. One therefore has a line in the sand from which to work out the gain subject to NRCGT.

Alternatively, one might carry out a simple straight-line time apportionment of the whole gain obtained over the period of ownership.

You can also decide not to make an apportionment, particularly if you want to establish an amount of loss on a property, or if there is loss up to 5 April 2015 and you want to set that against a gain from 6 April 2015.

Further apportionments are also allowed to reflect any non-residential use of the asset being disposed

The rate of tax where NRCGT applies

The rate of tax under NRCGTdepends on the person, or persons, disposing of the relevant property.

The rates are as follows:

  • For individuals / trustees: 18% / 28%
  • For personal representatives: 28%
  • (Privately held) Companies: 20%

Principal private residence relief (PPR relief)

As you may be aware, PPR relief is available where, and to the extent that, a property is the owner’s only or main residence. In addition to applying for periods of actual occupation, PPR relief can also apply to periods of ‘deemed’ occupation.

With effect from 6 April 2015, a non-resident can normally only obtain PPR relief on a UK residential property for a tax year for which an occupancy test is met.

For non-residents, any nomination for a UK residence to be regarded as their main residence for a given period from 6 April 2015 should be included in a NRCGT return (see below).

The occupancy test is met if you, or in combination with your spouse or civil partner (but with no double counting night counting of nights) stay overnight at the property at least 90 times during the tax year. If you own the property for only part of a year, then the number of required qualifying stays is proportionally reduced.

This new occupancy test doesn’t apply for any year that your spouse or civil partner is UK resident. PPR relief will instead apply for that year in the normal way.

If it was the main residence for periods before April 2015 these can be taken in to account. So, once again, one must slide and dice the ownership in to ‘pre’ and ‘post’ periods.

Reporting

So we come to the associated reporting requirements. Everyone’s favourite bit!

Essentially, it will depend whether the person disposing of the property is within the Self-Assessment system.

If they are, then the person must file a specific tax return (referred to rather catchily as the NRCGT return) within 30 days. He, She or It must also report on his tax return and pay over the tax in the normal time-frames.

If He, She or It is not within the Self-Assessment system, then they must report and pay any tax within 30 days.

This system has been fiercely criticised since its introduction and has led to the imposition, and cancellation, of many penalties.

 

Non UK resident property investors capital gains tax is the fifth article in a collection of articles on non UK resident investors property tax for residential properties. The other articles are:

  1. Non UK resident property investor tax: An introduction;
  2. Non UK resident investor tax: SDLT;
  3. Non UK resident investor tax: 3% Additional rate of SDLT;
  4. Non UK resident investor tax: ATED;
  5. Non UK resident property investors capital gains tax;
  6. Non UK resident investor tax: IHT

For changes announced in the Autumn Budget 2017 regarding commercial property and shares in property rich companies then please see here.

 

If you have any queries surrounding Non UK resident property investors capital gains tax then please get in touch.

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