Capital gains tax for non-resident homeowners
Written by Ray Coman
From 6 April, non-UK residents will be liable to capital gains tax on the disposal of UK residential property.
It will only be increases in property value from April 2015 that will be taxable. Consequently, the taxation of non-residents will take effect gradually.
Background to the rule change
Until 5 April 2015, an individual is outside the scope of UK capital gains tax if not UK resident for five complete tax years. If there were any taxation of a gain on UK property, this would be imposed by an authority outside the UK.
Before the new ruling, the UK system was unusually relaxed compared to the rules adopted in other countries. The new rules attempt to redress the unfairness of a UK resident paying more tax than a non-resident, on the same property.
How the gain is calculated
Capital gains tax will only apply to non-residents for gains made after 5 April. A property vendor will have three methods of calculating their taxable gain.
- Rebase the value of their property on 6 April 2015. This is likely to be most popular given recent increases in property prices. A professional valuation should help avoid any matter of contention with HMRC.
- Apportion the gain evenly over the period of ownership of the property. For instance, a property owned for five years and sold on 5 April 2016 would be liable to tax on a fifth of its gain. This method would be less attractive than option one if the last year of ownership witnessed below average gains.
- Base the capital gains tax on the total period of ownership. This may be a preferred option if there is an overall loss to report.
How the tax is calculated
Non-residents will be entitled to an annual exemption. To the extent that the taxpayer has available basic rate the gain will be taxed at 18%, thereafter the gain would be taxed at 28%. With less likelihood of having other UK income than a resident, the use of the 18% tax rate provides an opportunity for non-residents to save tax. The following article provides further information about how capital gains tax is calculated generally.
Closely held companies will be subject to tax at 20% on their chargeable gains. A closely held company is company owned by five or fewer participators (i.e. shareholders) or under the majority control of directors. Consequently, institutional investors and unit trusts will not be subject to the new rules.
It is rarely tax efficient for a private investor to own property via a company. The tax drawback of using a company to own residential property will continue for non-residents. Furthermore, there are no longer stamp duty benefits to purchasing property via a company.
Trusts will continue to be subject to tax at the trust rate, currently 28%. The annual exemption for a trust is half of what is available for individuals. Partners in a partnership will pay tax, as individuals, on their portion of the gain.
What property will be affected
The rules will apply to the disposal of a property which is suitable for use as a dwelling. In short, this will affect residential property. However, there is a concern that premises suitable for use as a dwelling but actually used for business purposes would be subject to the rules.
This is because commercial property owned by non-residents will not be subject to the new rules, but will continue to benefit from the pre 5 April 2015 rules.
Non-residents owning communal accommodation, such as nursing homes, care homes and student accommodation, will not be under the new regime.
Principal Private Residence
Currently a UK taxpayer does not have to pay capital gains tax on their home. In technical terms, there is no capital gains tax on a principal private residence, (PPR), namely a property which is both owned and occupied by the same individual.
The PPR rulings have so far been silent about how long a property would need to be occupied in order for it to be considered as a person’s home. Thus, the interpretation about the length of time a person should live in a property to make it their PPR has been left to the interpretation of HMRC. This is particularly problematic where a person has more than one home. If a person has two properties that could qualify for PPR then they can nominate which is their PPR. This nomination process is open to abuse by non-residents who could claim their UK property as their PPR and therefore avoid any UK capital gains tax.
As an anti-avoidance provision, a non-resident will only be able to nominate a property as a PPR where the owner has been physically present in their home at midnight for 90 days or more in the tax year.
For the purposes of PPR relief, a spouse will be deemed to occupy a property for the same period as their husband or wife.
Use of losses
For non-residents, a loss on a UK residential property can only be set against gains made on other such property in the same tax year. Any unused losses are carried forward to reduce future gains on UK residential property. Where a person becomes UK resident, a loss on their property can be used against any taxable gains.
Administration of tax
For individuals who already complete a Tax return the gain would be included in a Tax Return. Many non-residents let out their UK property and will therefore already complete Returns. For individuals who do not complete a Tax return, the gain would be reported to HMRC within 30 days. HMRC will require notification of a property disposal if there is a loss or if there is no gain.
Because gains will only be taxable from 6 April 2015, the change in capital gains tax will have little overall impact in the short term. Nonetheless, an obvious unfairness has been addressed without causing any sudden disturbance to the UK property market.
Coman & Co has experience advising clients on their exposure to property taxation. We have a particular expertise in dealing with non-UK residents, and have the facility to manage all areas of compliance from Tax return preparation to acting as agents for dealing with HMRC.