The Government has published revised proposals to tax non-UK residents on gains on UK residential property with effect from April 2015. Non-residents will remain exempt from UK tax on gains on commercial property unless it is used as part of a trade carried on through a UK permanent establishment. The Government has been consulting on the proposals for several months and the revised proposals address some of the issues raised during the consultation process. Draft legislation is expected to be published next week and this will be supplemented in due course by guidance notes.
Residential property: definition and exclusions
The charge will apply to disposals of residential property, defined as property suitable for use as a dwelling, including property in the course of construction or adaptation for such use. Unlike the ATED regime, the charge will not be restricted to higher value properties and there will not be an exemption for commercially let properties. However, there will be exemptions for certain communal residential properties. Care homes and nursing homes will be exempt, but sheltered housing will not. Student halls of residence and purpose built student accommodation will be exempt, but not family homes let to students.
Where there is a change of use during the period of ownership, the gain will be time apportioned and only the part attributable to periods of residential use will be taxable.
Who is liable to pay?
Unlike ATED-related CGT, this new charge will also apply to non-UK resident individuals as well as companies and other entities. Partnerships will generally be treated as transparent and any CGT on disposal of UK residential property will be charged on the partners individually. Non-resident trusts will also be within the scope of the charge, but may be entitled to the main private residence relief if a beneficiary satisfies the requirements for that relief.
Not all companies will be within the charge. The Government intends to exempt widely-held investment funds, institutional investors and pension funds established for the benefit of a diverse range of individuals. However, closely-held companies will be within the charge, so small groups of individuals and families will not be able to avoid the charge by holding their interests in UK residential property through a company. The starting point will be the existing close company test which looks at whether the company is controlled by five or fewer participators and their associates, but the test will be modified to ensure that partners are not automatically treated as connected with each other because of their common interests in the partnership (a change which would also be very welcome in other areas of taxation).
Main Private Residence Exemption
As expected, the main private residence (MPR) exemption is to be modified and will only apply to a property for a tax year if in that year:
- it is in the jurisdiction in which the taxpayer is resident; or
- it is in a jurisdiction in which the taxpayer has spent at least 90 midnights in that property or other properties also owned by him or her; occupation by a spouse or civil partner will count as occupation by the taxpayer for this purpose, which raises the interesting question whether relief can be maximised by couples spending time apart in separate residences!
If the MPR exemption were retained in its current form, most non-UK residents would, of course, elect for their UK property to be their main residence, even if they spent very little time there. However, it would be contrary to EU law to restrict the MPR exemption to UK residents. The modified MPR exemption therefore applies a test which requires the taxpayer to spend significant time in the relevant country and applies equally to UK resident and non-UK resident taxpayers. This means that UK residents may now no longer be able to elect for their foreign holiday homes to be their main private residences for UK CGT purposes if they do not satisfy the 90 day test in the relevant country, although they should be entitled to credit for any foreign tax paid on the capital gain. Non-residents seeking to satisfy the 90 day test should take care not to inadvertently become UK resident; Presence in the UK for more than 90 days is one of the factors which may point towards UK residence under the new statutory residence test.
Rebasing to April 2014
The Government has confirmed that growth in value pre-April 2015 will not be taxed and that taxpayers will be able to choose whether to rebase the property at its market value at 6 April 2015 or to apportion the gain over the period of ownership.
Tax rates and compliance
Individuals will be liable to tax at 18% or 28% depending on their total income and gains in the relevant tax year. They will be entitled to the annual exempt amount and to offset losses on UK residential property against gains on UK residential property. Trustees will be taxed at 28% with the benefit of half the annual exempt amount available to individuals.
Non-resident companies will generally be liable to tax on gains on UK residential property at 20% but, if they are also liable to ATED-related CGT, that will take priority and will be charged at 28%. The Government received several representations that ATED-related CGT should be abolished in the light of the wider charge on non-residents but has decided to retain it as the ATED charge is intended to address SDLT avoidance through “enveloping” whereas the new charge is not to counter avoidance but instead to rectify a perceived unfairness in the UK tax system giving non-residents an exemption not available to UK residents.
Companies will be entitled to indexation relief. Groups will be able to operate a pooling arrangement to aggregate gains and losses across the group, but there will be a “de-pooling charge”, a deemed disposal at market value, when the owning company leaves the group.
The new charge will take precedence over section 13 TCGA which attributes gains of non-UK resident close companies to their UK shareholders. Presumably this means that the section 13 charge will fall away even though the company pays tax at 20% but the shareholders would otherwise pay it at 28% but this will need to be clarified when the legislation is published.
As many of the non-residents brought within this charge will not already be known to HMRC, there will be obvious difficulties in ensuring that the tax is paid following sale. There was concern that buyers, agents or solicitors might become liable to account for a form of withholding tax, but the Government has been persuaded that a “payment on account” process would be appropriate rather than a “true” withholding tax. The details have yet to be finalised but it is expected that a person who is not already within the self-assessment system will be required to deliver a return for the disposal within 30 days of completion and make payment of the tax at that time or claim an exemption such as main private residence relief. There would be no obligation on lawyers and others involved in the transaction to account for the tax but it is thought likely that they may do so, rather in the way that SDLT is dealt with in the same 30 days period post-completion. However, if the seller has no remaining property in the UK, there may be difficulty enforcing liability if a non-compliant seller fails to notify and pay the tax.