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CGT and non-residents: issues in the condoc

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In December, George Osborne announced that from April 2015, a capital gains tax charge would apply to gains made by non-residents on residential property. A consultation on this measure has now finally been published. When one looks at the document, the delay seems unsurprising, as the measure has still not been fully worked out. However, it does raise significant issues – and not just for non-residents.

Most significantly, it is proposed to amend or remove the ability for a taxpayer to elect which property is their main residence for capital gains tax purposes. In the absence of such a change, where a non-resident individual has only one home in the UK, it would be a relatively simple exercise to elect for that property to be their main residence for UK capital gains tax. As there will be no liability to UK capital gains tax on a residence outside the UK, nothing would be lost by electing for the UK property to be the main residence.

Therefore, in order to make a tax charge on non-residents stick, this rule needs to change. Two possible approaches are suggested: a purely factual assessment (subjective); and a fixed rule that identifies a person’s main residence with something similar to the statutory residence test (a day count procedure). It is hard to see how either approach can work if the rule continues to be that a married couple can have only one main residence. The interaction with periods of absence also looks tricky and, in any case, main residence relief will already be severely restricted by the reduction of the final qualifying period to only 18 months.

There is also conflict with the new ATED regime, as that will apply to residential property with a value over £500k but with more reliefs than for an individual owner. Therefore, whilst ATED is designed to discourage residential property ownership by corporates, a non-resident with a UK let property portfolio would be better advised to own the properties through a company – there is no ATED capital gains tax charge, whereas capital gains tax would apply personally. Now that is a plot twist! There are also different definitions of residential property in different taxes, with some broad and some narrow so that tensions are bound to arise.

A further idea is that a withholding tax could apply, so that a solicitor selling a property for a non-resident would be required to deduct tax at source in order to ensure that the tax is collected. Whilst fairly obvious, it does open up the possibility of that being extended to UK residents outside self-assessment in future.

The consultation closes on 20 June 2014.