Capital gains tax for non-residents disposing of residential property

This article was produced by Nabarro LLP, which joined CMS on 1 May 2017.

Summary and implications

New rules are being introduced to extend capital gains tax (CGT) in relation to non-UK residents disposing of UK residential property.

The new rules:

• will apply to disposals of residential property used or suitable for use as a dwelling;
• affect individuals and a wide range of property ownership structures through which individuals invest, such as partnerships, companies and funds;
• apply to disposals of residential property on or after 6 April 2015; and
• only apply in respect of capital gains accruing after this date.

Background

Historically, the disposal of UK residential property by non-UK residents has not been subject to CGT.

With the introduction of the Annual Tax on Enveloped Dwellings (ATED) in April 2013, CGT was extended to catch non-natural persons, whether UK or non-UK resident, disposing of UK residential property with a value of at least £2 million (reducing to £1,000,000 from April 2015). The scope of ATED-related CGT charge is limited by a wide range of reliefs including an exemption for 'bone fide' property investment companies.

In 2013, the Government announced that from April 2015 it would extend CGT to gains made by non-resident individuals disposing of UK residential property, regardless of their value or use.

The Government proposed this new regime as a means of addressing what it described as an imbalance between the treatment of UK and non-UK residents disposing of UK residential property. The UK does not generally charge CGT on disposals by non-residents. But UK residents are liable to CGT or corporation tax. The Government's intention behind this new regime is that, going forward, non-residents and residents making gains on UK residential property will be subject to UK CGT in a comparable way.

Draft legislation was published last month. The key points to note from the new rules are set out below.

What will be caught - definition of 'residential property'

The new regime extends the CGT charge to property 'used or suitable for use as a dwelling' or property which 'is in the process of being constructed or adapted for such use'.

Disposals of multiple dwellings, which are treated as a non-residential land transaction for Stamp Duty Land Tax purposes, will not be excluded from the extended CGT charge. Certain types of communal accommodation will be excluded (such as purpose built student accommodation and care homes).

Who will be caught by the new CGT charge

CGT will be extended to gains made by non-resident individuals; partners of partnerships; trustees, companies; and funds.

However, the Government has stated that it does not wish to put barriers in the way of genuine institutional investment; therefore it has included some specific exceptions for:

• companies that are not 'closely held'; and
• 'qualifying institutional investors'.

A 'qualifying institutional investor' means either:

• a widely marketed unit trust;
• a widely marketed open ended investment company;
• a pension fund; or
• a sovereign wealth fund.

CGT Rate

For individuals, the CGT tax rate will be 18% or 28% depending on the level of the individual's other UK source gains in the tax year of disposal.

For trustees the rate will be 28%.

For companies, the rate will be 20% (unless the company is already within the scope of ATED in which case the rate will be 28%).

For transparent partnerships, partners will be chargeable to CGT depending on whether they are an individual, trustee or company. Non-transparent partnerships will be taxed as companies.

Principal Private Residence Relief (PPR)

Currently, an individual is entitled to relief from CGT on the sale of their main residence. Taxpayers with more than one residence are able to elect to choose which residence their main residence is for PPR purposes.

Without any change to the current PPR rules, a non-UK resident with a UK residential property could nominate it as their main residence to obtain PPR, and thereby avoid the extended CGT charge.

Accordingly, a new rule is being introduced to restrict the availability of PPR for non-UK residents with property in the UK. From 6 April 2015, PPR relief will require the individual to meet a “day count test” in relation to the residence for each tax year for which it is claimed. Broadly, this test will require an individual or their spouse/civil partner to spend at least 90 midnights in the property in the tax year in order to claim PRR.