The extended Capital Gains Tax charge on residential property
From 6 April 2015, non-UK residents have been subject to UK Capital Gains Tax on the disposal of UK residential property.
Please note that commercial property held as an investment asset remains outside the scope of CGT. Also as part of the changes, any non-resident who disposes of relevant property is required to give particulars of the disposal to the UK tax authorities within 30 days of the disposal. This remains the case even if the disposal gives rise to no capital gain and to no tax charge.
The new CGT regime sits alongside the ATED regime (see here) which applies, broadly speaking, to certain residential property owned by “non-natural” persons, and where ATED applies it will take priority over the CGT charge.
However, the scope and exemptions of the ATED regime differ very significantly from the extended CGT charge, so great care is needed in the interaction between the two. It is even possible that in some cases, a single disposal may give rise to tax charges under both the ATED regime and the extended CGT regime.
What property is within the charge?
The CGT charge applies to all directly held UK residential property. But (unlike some similar charges in other jurisdictions) it does not apply to gains on the sale of share or units in a company or fund which owns UK residential property.
Unlike the ATED regime, there are no general exclusions for property held for the purposes of a property rental business or in course of a property development activity.
Certain types of communal residential property are excluded from the charge. These include: accommodation used as a children’s home; care homes for those in need because of (e.g.) old age or disability; communal accommodation for members of the armed forces; prisons and similar establishments; and Purpose Built Student Accommodation (PBSA).
PBSA is defined as:
- A building that is purpose built or converted for use by students, has at least 15 bedrooms and is actually used by students studying for a course; or
- Accommodation excluded from registration under Housing Act 2004 as (broadly) a hall of residence.
Houses that merely have rooms let out to students are within the charge.
Property which is in the process of being converted to a dwelling is within the charge, as is residential property sold “off plan” (i.e. before it has been built). Bare land and residential property being converted to commercial use will normally be regarded as non-residential and outwith the scope of the charge.
What owners are liable?
The charge to CGT applies to all non-resident individuals, trustees and other persons holding UK residential property. Companies are within the charge only if they fall within a “narrowly controlled company test”. This broadly applies to companies controlled by five or fewer persons, unless one of those five persons is either a company which is not narrowly controlled or is a qualified institutional investor.
Qualified Institutional Investors (QIIs)
QIIs are exempt from the charge. A QII includes pension funds for large numbers of people, sovereign wealth funds and large financial institutions, and also companies controlled by QIIs.
QII status also extends to a company which is a Collective Investment Scheme, provided it can show that it has genuinely widely marketed the fund to intended categories of investor for the five years prior to disposal (or period of ownership if shorter).
The broad effect of the above is that for companies, the CGT charge applies mainly to family and private groups held by relatively small numbers of people.
Rate of tax, computation and reliefs
For non-resident companies, tax is at the same 19% rate as applies to UK-resident companies. Indexation allowance is available in computing gains (in contrast to the rules for ATED related gains where no allowance is available). Groups of companies can offset gains and losses on UK residential property, provided they can provide HMRC with proof of their ownership structure.
Individuals are subject to tax at 18% or 28% depending on their level of UK income, and the annual CGT exempt amount is available. Losses from UK residential properties can be offset against gains from UK residential properties in the same or future periods.
Trusts are subject to tax at 28%.
Where the property was owned at 6 April 2015, the charge under the new regime extends only to the gain which accrues after that date. The normal rule is that the gain will be calculated as if its base cost is its value at 6 April 2015.
However, the taxpayer can elect to use a time apportionment basis if preferred (unless the disposal is also within the ATED rules). In all cases, the taxpayer can choose to use the actual gain arising over his whole period of ownership.
It may well be worth obtaining either a formal valuation or informal contemporary evidence of the valuation of the property at April 2015, as this could be more difficult to do when the property comes to be sold, perhaps many years later.
Principal Private Residence relief for homes
Like any other individual, a non-resident individual may in principle be able to claim a measure of relief from tax (“Principal Private Residence Relief”) where the property sold is or has been his or her home. However, the general rule (applying to residents and non-residents alike) is that a property can qualify for relief for a tax year only if:
- The person selling the property was tax resident in the same country as the property is located; or
- The person spent at least 90 midnights in the property in the year.
Given that in many cases a person consistently spending 90 midnights in the UK may become tax-resident here, the practical effect of the rules will in many cases be that a non-resident will be unable to claim the relief.
Mechanics of filing and collection of tax
Each separate disposal must be notified to HMRC within 30 days of completion, regardless of whether a gain arises. This must be done by using HMRC’s online reporting facility.
If the disposal gives rise to a tax liability, HMRC will email a payment reference with details of how to pay. Interest and penalties will apply if the return is made late (even if no tax is due) or if any payment due is made late.
If you are already within the normal self-assessment regime (as will normally be the case where the property has been let and UK tax has been payable on the income) or have filed a return under the ATED regime for the property in the tax year preceding the disposal, the rules are slightly different. The obligation to notify HMRC of each separate disposal within the 30-day deadline remains unaltered, but you do not need to compute or pay the tax at that time.
You can instead elect to do so at usual time (normally by 31 January following the end of the tax year) as part of your normal self-assessment return. It appears, however, that you are still obliged to notify the amount of the gain itself under the new regime and within the 30-day deadline.
More detailed guidance is available from HMRC’s website: Capital Gains Tax for non-residents: UK residential property
For more information or help from one of our property tax specialists, please contact us using the enquiry form below.