What’s happened?
The UK government’s long awaited final proposals for CGT on non-UK residents owning UK residential property have now been published.
The government believes that CGT should apply to disposals of UK residential property by residents and non-residents alike. The government states that it is ‘rectifying the unfairness in the system that currently allows non-residents to escape UK CGT on disposals of UK property that are or could be used as a dwelling house’.
The plans for the new CGT charge were first announced in the 2013 Autumn Statement and a consultation document followed in March 2014. Mishcon de Reya responded to the consultation document and took part in working groups with HM Treasury and HMRC throughout early summer 2014 to discuss the changes.
The changes will be enacted through Finance Act 2015, a draft of which will be released on 10 December 2014.
What property will be subject to the new CGT charge?
The charge will apply to sales and gifts of UK residential property. This is defined as ‘property suitable for use as a dwelling’ as well as property in the process of being constructed or adapted for use as a dwelling. It also includes land that forms the garden or grounds of a residential building.
The government makes a clear statement that it ‘…does not intend to broaden the scope of the charge and apply CGT to disposals of interests in non-residential property’. Whether this is sufficient comfort to those concerned that CGT will eventually also apply to commercial property owned by non-residents remains to be seen. If the new charge is an effective revenue-raiser, with minimal impact on the market, the temptation to extend it to commercial property may be too great for any government to resist.
Despite responses from practitioners that this would be a good opportunity to standardise the different definitions of ‘residential use’ across the tax legislation, the government has declined to do so. This is a missed opportunity. Indeed yet more definitions will be added into the mix to make it clear that certain types of communal accommodation (such as purpose built student accommodation) are not caught by the new CGT charge.
Who will be subject to the new CGT charge?
The charge will apply to non-resident individuals, non-resident trustees, non-resident individuals who are partners, personal representatives of a non-resident deceased person and some non-resident companies disposing of UK residential property.
Any chargeable gain on the disposal of UK residential property by a non-UK partnership will result in a proportionate CGT charge on each partner individually.
The new CGT charge will take precedence over existing anti-avoidance provisions that attribute a company’s gains to its shareholders or a trust’s gains to its settlor or beneficiaries.
There is an exemption for residential properties held by institutional investors and funds so that only ‘narrowly controlled companies’ will be subject to the new CGT charge. These are to be defined as non-resident companies which can be controlled by five or fewer persons and will generally be the private investment vehicles of individuals and their families. Restricting the charge to ‘narrowly held companies’ is sensible given the government’s need to encourage institutional investment in UK housing. What is less welcome is yet another definition to sit alongside the existing ‘close company’ definition.
What will the rates of CGT be?
The rate for non-resident companies which are not already within the ATED-related CGT regime will be 20% to mirror the UK corporate tax rate. There will be a form of indexation allowance so that inflationary gains are not taxed. Groups of companies will be permitted to operate a limited form of pooling to offset gains and losses made on disposals of UK residential properties by different members of the same group.
The rate of tax for non-resident individuals will be the same as the CGT rates for UK individuals. These are currently 18% or 28% depending on the individual’s total UK income and chargeable gains for the tax year. Non-resident individuals will have access to the annual exempt amount of taxable gains (currently £11,000).
The rate for non-resident trustees will be 28%, in line with the treatment of UK-resident trustees, with the annual exempt amount being half that available to individuals.
Will ATED-related CGT be abolished?
No. Despite many concerns raised by practitioners, including Mishcon de Reya, the UK government is retaining the ATED-related CGT regime as an ‘important part of the package of measures to deter enveloping of property’. The ATED-related CGT charge will remain at 28% on disposals of property by non-resident companies subject to ATED, and the ATED-related CGT charge will take precedence over the new CGT charge where both apply.
We are concerned about the complexity that retaining ATED-related CGT may cause, and we raised this in our consultation response in June 2014. It is quite possible that a non-resident company could be subject to both regimes where the property has been owner-occupied and then just by the new regime where the property is subsequently rented out, with different tax rates applying to each. Indeed a company could move in and out of the two regimes where the use of the property regularly changes. Fortunately it seems a separate property valuation will not be required at each change of use: time apportionment of the overall gain will be available to calculate the amount of gain subject to each regime. Nevertheless, there will need to be valuations of the property at the three points of 1 April 2012 (ATED), 6 April 2013 (ATED-related CGT) and 6 April 2015 (new CGT) in order to calculate the correct tax liability. Abolishing ATED-related CGT would have simplified matters and made very little difference to the amount of tax collected.
What will be the impact on the CGT main residence exemption?
A new rule will restrict access to the main residence exemption for properties located in a jurisdiction in which the individual is not tax resident. Without this new rule, a non-resident with a residential property in the UK could nominate it as their main residence, claim the main residence exemption on sale and have no UK tax liability on their other houses around the world.
The new ‘90 day rule’ means that a non-UK resident individual must spend at least 90 midnights in their UK property (or in all their UK properties) to be able to elect for a UK property to be their main residence for CGT purposes in any tax year. The rule also affects UK residents with residential property outside the UK. They will have to satisfy the 90 day rule for their overseas property if they want to claim the exemption on that property.
If the individual does not meet the 90 day rule, he will be regarded as being absent from the property for the entire tax year and the main residence exemption will not be available for that tax year.
Occupation by an individual’s spouse or civil partner is regarded as occupation by the individual for these purposes. That appears to be generous if it means that a non-resident couple can claim the exemption on their UK property where they each separately spend, say, 50 nights in the property.
These changes are controversial as they affect UK residents as well as non-UK residents and have effectively been brought in by the back door under the guise of a new regime supposedly only affecting non-residents. We argued strongly against removing the ability to make a main residence election, and that if the government insisted on proceeding with its proposals, the right to elect should at least be preserved for those who spend a minimum number of days in the elected property. We are pleased that the government has decided to implement our proposal. Although the 90 day rule might adversely affect a small number of UK residents with properties abroad, it will broadly achieve the government’s intention of preventing or deterring most non-residents from claiming the exemption on their UK property. That said, many non-residents may be able to meet the 90 day test without necessarily becoming UK resident under the recently introduced statutory residence test.
Also following our representations, the government has clarified that the main residence exemption will be available to non-resident trusts provided a beneficiary occupies the property and, if non-resident, also satisfies the 90 day rule.
The 90 day rule may impact on the nightlife of some of our fun-loving clients who rarely spend any midnights in their property. A 4am rule would have been preferable.
How will the CGT be calculated and collected?
The new CGT charge will not apply to any gains relating to periods before 6 April 2015. Taxpayers can choose between using the property’s 6 April 2015 value as the base cost or applying a time-apportionment of the entire gain. The most favourable method will not be apparent until the property is sold, which might be many years away. Affected non-residents should therefore commission a 6 April 2015 valuation in any event, while the evidence is easily available. Time-apportionment is not available if the disposal is also subject to ATED-related CGT.
Non-residents caught by the new CGT charge will be obliged to report a disposal of the property to HMRC within 30 days of completion and then make a payment of the tax due within certain time limits.
The government rejected a withholding tax system for several reasons, including the fact that agents acting for taxpayers would be under an onerous burden to determine their residence status at the time of completion when this might not be possible to determine until the end of the tax year. The risk will be that some non-residents may simply refuse to pay the tax and it is hard to see what effective enforcement steps HMRC could take if the taxpayer has no other connections with the UK. The design of the process is apparently ‘yet to be finalised’, but with effective joined up thinking between HMRC and the immigration authorities, non-payers may find future visits to the UK could be costly.
What’s happened?
The UK government’s long awaited final proposals for CGT on non-UK residents owning UK residential property have now been published.
The government believes that CGT should apply to disposals of UK residential property by residents and non-residents alike. The government states that it is ‘rectifying the unfairness in the system that currently allows non-residents to escape UK CGT on disposals of UK property that are or could be used as a dwelling house’.
The plans for the new CGT charge were first announced in the 2013 Autumn Statement and a consultation document followed in March 2014. Mishcon de Reya responded to the consultation document and took part in working groups with HM Treasury and HMRC throughout early summer 2014 to discuss the changes.
The changes will be enacted through Finance Act 2015, a draft of which will be released on 10 December 2014.
What property will be subject to the new CGT charge?
The charge will apply to sales and gifts of UK residential property. This is defined as ‘property suitable for use as a dwelling’ as well as property in the process of being constructed or adapted for use as a dwelling. It also includes land that forms the garden or grounds of a residential building.
The government makes a clear statement that it ‘…does not intend to broaden the scope of the charge and apply CGT to disposals of interests in non-residential property’. Whether this is sufficient comfort to those concerned that CGT will eventually also apply to commercial property owned by non-residents remains to be seen. If the new charge is an effective revenue-raiser, with minimal impact on the market, the temptation to extend it to commercial property may be too great for any government to resist.
Despite responses from practitioners that this would be a good opportunity to standardise the different definitions of ‘residential use’ across the tax legislation, the government has declined to do so. This is a missed opportunity. Indeed yet more definitions will be added into the mix to make it clear that certain types of communal accommodation (such as purpose built student accommodation) are not caught by the new CGT charge.
Who will be subject to the new CGT charge?
The charge will apply to non-resident individuals, non-resident trustees, non-resident individuals who are partners, personal representatives of a non-resident deceased person and some non-resident companies disposing of UK residential property.
Any chargeable gain on the disposal of UK residential property by a non-UK partnership will result in a proportionate CGT charge on each partner individually.
The new CGT charge will take precedence over existing anti-avoidance provisions that attribute a company’s gains to its shareholders or a trust’s gains to its settlor or beneficiaries.
There is an exemption for residential properties held by institutional investors and funds so that only ‘narrowly controlled companies’ will be subject to the new CGT charge. These are to be defined as non-resident companies which can be controlled by five or fewer persons and will generally be the private investment vehicles of individuals and their families. Restricting the charge to ‘narrowly held companies’ is sensible given the government’s need to encourage institutional investment in UK housing. What is less welcome is yet another definition to sit alongside the existing ‘close company’ definition.
What will the rates of CGT be?
The rate for non-resident companies which are not already within the ATED-related CGT regime will be 20% to mirror the UK corporate tax rate. There will be a form of indexation allowance so that inflationary gains are not taxed. Groups of companies will be permitted to operate a limited form of pooling to offset gains and losses made on disposals of UK residential properties by different members of the same group.
The rate of tax for non-resident individuals will be the same as the CGT rates for UK individuals. These are currently 18% or 28% depending on the individual’s total UK income and chargeable gains for the tax year. Non-resident individuals will have access to the annual exempt amount of taxable gains (currently £11,000).
The rate for non-resident trustees will be 28%, in line with the treatment of UK-resident trustees, with the annual exempt amount being half that available to individuals.
Will ATED-related CGT be abolished?
No. Despite many concerns raised by practitioners, including Mishcon de Reya, the UK government is retaining the ATED-related CGT regime as an ‘important part of the package of measures to deter enveloping of property’. The ATED-related CGT charge will remain at 28% on disposals of property by non-resident companies subject to ATED, and the ATED-related CGT charge will take precedence over the new CGT charge where both apply.
We are concerned about the complexity that retaining ATED-related CGT may cause, and we raised this in our consultation response in June 2014. It is quite possible that a non-resident company could be subject to both regimes where the property has been owner-occupied and then just by the new regime where the property is subsequently rented out, with different tax rates applying to each. Indeed a company could move in and out of the two regimes where the use of the property regularly changes. Fortunately it seems a separate property valuation will not be required at each change of use: time apportionment of the overall gain will be available to calculate the amount of gain subject to each regime. Nevertheless, there will need to be valuations of the property at the three points of 1 April 2012 (ATED), 6 April 2013 (ATED-related CGT) and 6 April 2015 (new CGT) in order to calculate the correct tax liability. Abolishing ATED-related CGT would have simplified matters and made very little difference to the amount of tax collected.
What will be the impact on the CGT main residence exemption?
A new rule will restrict access to the main residence exemption for properties located in a jurisdiction in which the individual is not tax resident. Without this new rule, a non-resident with a residential property in the UK could nominate it as their main residence, claim the main residence exemption on sale and have no UK tax liability on their other houses around the world.
The new ‘90 day rule’ means that a non-UK resident individual must spend at least 90 midnights in their UK property (or in all their UK properties) to be able to elect for a UK property to be their main residence for CGT purposes in any tax year. The rule also affects UK residents with residential property outside the UK. They will have to satisfy the 90 day rule for their overseas property if they want to claim the exemption on that property.
If the individual does not meet the 90 day rule, he will be regarded as being absent from the property for the entire tax year and the main residence exemption will not be available for that tax year.
Occupation by an individual’s spouse or civil partner is regarded as occupation by the individual for these purposes. That appears to be generous if it means that a non-resident couple can claim the exemption on their UK property where they each separately spend, say, 50 nights in the property.
These changes are controversial as they affect UK residents as well as non-UK residents and have effectively been brought in by the back door under the guise of a new regime supposedly only affecting non-residents. We argued strongly against removing the ability to make a main residence election, and that if the government insisted on proceeding with its proposals, the right to elect should at least be preserved for those who spend a minimum number of days in the elected property. We are pleased that the government has decided to implement our proposal. Although the 90 day rule might adversely affect a small number of UK residents with properties abroad, it will broadly achieve the government’s intention of preventing or deterring most non-residents from claiming the exemption on their UK property. That said, many non-residents may be able to meet the 90 day test without necessarily becoming UK resident under the recently introduced statutory residence test.
Also following our representations, the government has clarified that the main residence exemption will be available to non-resident trusts provided a beneficiary occupies the property and, if non-resident, also satisfies the 90 day rule.
The 90 day rule may impact on the nightlife of some of our fun-loving clients who rarely spend any midnights in their property. A 4am rule would have been preferable.
How will the CGT be calculated and collected?
The new CGT charge will not apply to any gains relating to periods before 6 April 2015. Taxpayers can choose between using the property’s 6 April 2015 value as the base cost or applying a time-apportionment of the entire gain. The most favourable method will not be apparent until the property is sold, which might be many years away. Affected non-residents should therefore commission a 6 April 2015 valuation in any event, while the evidence is easily available. Time-apportionment is not available if the disposal is also subject to ATED-related CGT.
Non-residents caught by the new CGT charge will be obliged to report a disposal of the property to HMRC within 30 days of completion and then make a payment of the tax due within certain time limits.
The government rejected a withholding tax system for several reasons, including the fact that agents acting for taxpayers would be under an onerous burden to determine their residence status at the time of completion when this might not be possible to determine until the end of the tax year. The risk will be that some non-residents may simply refuse to pay the tax and it is hard to see what effective enforcement steps HMRC could take if the taxpayer has no other connections with the UK. The design of the process is apparently ‘yet to be finalised’, but with effective joined up thinking between HMRC and the immigration authorities, non-payers may find future visits to the UK could be costly.
