From April 2015 HMRC will implement new Capital Gains Tax legislation on UK residential property non-UK residents
For Companies ATED-related gains will take precedence over the new CGT rules
PPR relief for non-UK resident individuals will be restricted from April 2015;
The restrictions may also affect UK resident individuals disposing of a property abroad
In this newsletter we discuss the draft legislation in Finance Bill 2015 for the new CGT charge on UK residential property for non-UK residents and the changes to principal private residence relief.
It is important to be aware that the changes do not affect residential property used in a trade of property development.
The new CGT charge on relevant gains
The new CGT charge taxes relevant gains on UK residential property from 6 April 2015 by non-residents, subject to limited exemptions. Unlike the ATED-related CGT charge for companies, the new charge on “relevant gains” will apply irrespective of whether property is being rented out commercially to unconnected third parties.
For companies, it is very important to note that the existing ATED-related CGT charge takes precedence over the new CGT charge. Gains on property within the ATED charge will continue to be taxed at a rate of 28% on growth in value from April 2013. Residential property gains made by companies that are not within the ATED charge will be taxed at the normal corporation tax rate, which will be 20%, on growth in value from April 2015.
The new CGT charge on relevant gains for non-residents that are not companies (individuals, trusts, partnerships) will be at the normal CGT rates of 18% or 28%, depending on their status as basic rate or higher rate taxpayers.
Non-residents will have a choice of calculating gains in three ways:
- the default method of calculating gains is that the April 2015 value will be used as the base cost; or
- elect for straight line time apportionment of the gain over the whole period the property was owned; or
- elect to use the actual cost of the property as the base cost
Our recommendation is to obtain contemporaneous valuations of property at 5 April 2015 as this will help you make the best decision as to how to calculate the gain when the property is sold and will also minimise the scope for disputes over valuation with HM Revenue & Customs.
Exemptions from the new charge
Certain types of residential property are excluded from the new CGT charge, including hotels, hospitals, care homes, some types of student accommodation, prisons and boarding schools.
There are also exemptions for residential property owned by Open Ended Investment Companies and Unit Trusts that are “widely marketed funds”. Very broadly, the exemption is available where funds are not designed or available for small groups of investors and can be invested in by the public generally.
There is a further exemption for companies that are not controlled by five or fewer participators. These rules are complex but, subject to special anti-avoidance rules, it may be possible for a pension fund to own UK residential property indirectly and not suffer the new CGT charge.
If you believe you may qualify for any of the exemptions you should take advice to ensure this is the case or how you may be able to qualify for an exemption.
What should I do now?
Non-residents should review the ownership arrangements they have for UK residential property now. Properties owned directly by individuals and trusts will suffer a higher rate of CGT than companies which let the property commercially and if significant growth in value is expected after April 2015 it may be cost effective to consider whether a different ownership structure is appropriate.
We also recommend property owners to obtain valuations at 5 April 2015 and to consider whether the existing use of their property could be changed and whether this might improve the tax position.
CHANGES TO PRINCIPAL PRIVATE RESIDENCE RELIEF (PPR)
Currently, individuals are entitled to PPR on their only or main residence. If an individual has more than one residence in any given period they can elect which of them is their main residence and qualify for PPR for that period. The residence can be either a UK residence or an overseas residence. Where a property is the person’s only or main residence at any time in their ownership, the final 18 months of ownership always qualifies for PPR. Periods of absence or letting can also qualify for PRR when certain conditions are met.
It had also been proposed that the ability to elect which property was the PPR should be removed but the good news is the election will remain in place.
However, a new rule will restrict access to PPR for both a UK tax resident disposing of a residence in another country and a non-UK tax resident disposing of a UK residence.
From 6 April 2015 a person’s residence will not be eligible for PPR for a tax year unless
- the person making the disposal was tax resident in the same country as the property for that tax year, OR
- the person spent at least 90 midnights in that property in that tax year – the “90-day rule”.
For properties overseas the new 90-day rule will need to be met in all cases including where there is an existing PPR nomination. A nomination by an individual who is not UK resident for tax purposes will not be effective in respect of a UK property for a tax year unless they meet the 90-day rule for that year.
If the 90 day rule is not met by a non-resident in a particular tax year is becomes a non-qualifying year and part of the gain will be taxable when the property is sold.
Things to be mindful of…
The new 90 day rule in itself could have some implications for non-resident individuals with regards to their residency status in the UK. Access to a property in the UK and spending 90 days or more in the UK in a tax year count as “sufficient ties” to the UK for the Statutory Residence Test and, therefore, in some circumstances this could make a difference to whether a person is or is not UK tax resident. Therefore individuals may need to seek further UK tax advice before spending 90 days in the UK and nominating a UK property as their principal residence.
There is a potentially useful aspect of the new requirement to occupy the residence for 90 days if PPR is to be obtained. For married couples and civil partnerships, occupation of a residence by one spouse or partner will be regarded as occupation by the other. This means that couples can split the time spent in the property between you and your spouse, and still qualify for the new 90 day rule for PPR purposes, reducing the potential effect on your residency status.
It will be essential for non-UK residents to keep very good records of the time they spend in their UK homes from April 2015 onwards to show that the 90 day test has been met and claim PPR when the property is sold.
There could also be some relief to the 90 day rule for individuals that are tax resident in more than one jurisdiction. Under these circumstances individuals will be able to nominate which of their properties in those jurisdictions benefits from PRR without considering the 90-day rule.
If you would like to discuss the impact of any of the points raised above in more details, then please contact a member of our team.