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A New Capital Gains Tax Charge for Non-Residents

Fri 20 Jun 2014

This article first appeared in Migrant Women in June 2014.

What’s the background?

The UK does not generally charge capital gains tax (CGT) on gains arising from disposals of UK residential property by non-resident owners.

However, the government considers this to be an unfair situation, particularly when compared to UK tax residents who are subject to CGT on disposals of residential property (other than their main home), regardless of whether such property is situated in the UK or overseas.

Accordingly, in order to rectify the position, the government announced at the time of the 2013 Autumn Statement that legislation would be introduced and, on 28 March 2014, published a consultation document setting out its proposals.

So what’s being proposed?

With effect from 6 April 2015, the UK’s CGT regime will be extended to tax foreign residents who realise gains from a disposal of UK residential property.

It is currently understood that any gains which have accrued before this date will be excluded from the tax charge. However, in relation to those properties acquired before this date and disposed on or after this date, it will be necessary to calculate what amount of the total gain should be excluded from the CGT charge.

What type of residential property is caught?

The measures are aimed at property which currently is, or has the potential to be used as, a residence. Accordingly, this will catch property that is in the process of being constructed or adapted for such use. 

However, the charge is not simply limited to residential property which is occupied by a non-resident, but will also apply to second homes and buy-to-let investment property.

What’s the proposed rate of tax?

The objective is for non-residents to be taxed on a comparable basis to UK tax residents. Individual UK higher rate taxpayers are subject to a 28% CGT rate and basic rate taxpayers are liable to CGT at 18%.

Since the government expects to tax non-residents in the same way, it will be necessary for non-residents to declare their total UK income to ensure that the appropriate level of CGT is paid.  

It is currently unclear what would be the appropriate rate of CGT that will be charged on gains realised by non-resident companies, funds and other entities. Although the consultation document recognises that a 28% CGT charge may not be fair when compared to a UK company (which would be subject to a 20% tax charge), the government is committed to ensuring that non-residents are treated on the same basis as UK residents.

How will the tax be collected?

The UK government is proposing a withholding tax mechanism in order to collect the CGT payable and for this to operate alongside an option to self report the tax.

However, this will mean that the onus will shift so that agents (such as solicitors, accountants and/or real estate agents) will need to identify when they are acting for a non-resident, to calculate and withhold the correct amount of CGT (having to know the appropriate rate) and then to pay this over to HM Revenue & Customs within 30 days of the transaction having taken place. The non-resident taxpayer would then need to file a tax return for any actual amount due in order to claim back any excess CGT already paid. 

This will clearly put an additional administrative burden on professional advisers and others who act on behalf of non-residents on their residential property transactions.

Will any reliefs and/or exemptions be available?

The government is considering extending the availability of the principal private residence exemption (which broadly means that no CGT is payable on gains relating to a disposal of an individual’s main home) to non-residents. However, given that such individuals are non-resident this is likely to be of little help since their main home is expected to be in their country of residence and, therefore, outside the UK!

The CGT annual exemption (currently £11,000 for the 2014/15 tax year) will be available to non-resident individuals, but this is expected to be of nominal benefit.

What are the next steps?

The proposed CGT extension represents a significant change to the tax landscape for non-residents holding UK residential property.

Anyone who is likely to be caught by these measures should seek professional advice as soon as possible in order to consider what planning may be undertaken.

 

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