Non-resident capital gains tax
Written by Ray Coman
With an increasing, mobile population and cross border asset management, capital gains tax is a common concern for non-residents. Regulations on non-resident landowners have been subject to frequent change in recent years and the trend is for a tightening of policy.
UK residency for tax purposes is determined by the number of days physically present in the UK. Demonstrating that ties have been severed with the UK can help to support a non-resident claim where the number of days of absence, in itself, is not enough. Further details can be read in the guidance on statutory residence. It is possible to be treated as non-residency from the day of departure, provided the leaver does not return within a full tax year. A contract of employment lasting a full tax year is sufficient to demonstrate this. This is known as the split year treatment.
Temporary non-residents are liable to UK capital gains tax on disposal of assets (other than land and property.) The liability to tax is chargeable in the year of return to the UK and based on capital gains tax rates and allowances that applied in the year of disposal. Foreign tax credit will be available to reduce UK tax where the gain has been subject to tax overseas.
A temporary non-resident:
- Is UK resident for four complete tax years out of the preceding seven tax years prior to the year of departure;
- Leaves the UK and becomes non-resident; and
- Resumes residency within five complete tax years of departure.
Capital gains tax always applies to disposal of UK land and property, even if the non-residency is permanent. Gains on property are taxed in the year of disposal for all non-residents.
A non-UK resident disposing of property situated in the UK is required to report this disposal to HMRC within 30 days of completing contracts.
Property owners filing an annual Tax Return, usually because they are landlords, can defer payment of tax until the usual payment deadline. The payment deadline is 31 January following the end of the tax year on 5 April. The obligation to complete a non-resident capital gains tax form is in addition to the Tax Return requirement.
It is acceptable to use estimates in the initial non-resident Tax return, as the form can be amended later. The form asks whether estimates are being used and to provide further explanation. This is preferable to postponing filing a NRCGT Return due to incomplete information, as delayed disclosure could result in late filing penalty.
A non-resident landlord is exposed to UK capital gains tax on any appreciation in value of UK property.
Where property has increased in value since purchase, there is a considerable tax advantage to using its value at 6 April 2019.
Further information about this can be found here: https://www.gov.uk/guidance/capital-gains-tax-for-non-residents-calculating-taxable-gain-or-loss#rebasing-from-2019 and here: https://comanandco.co.uk/capital-gains-tax-for-non-resident-homeowners
An estate agent valuation is acceptable. An opinion from a chartered surveyor is preferable.
Companies that own UK property will be liable to corporation tax on the disposal, regardless of whether the company is incorporated in the UK.
In tax terminology, a home is referred to as a principal private residence (PPR.) It is the property that is both owned and occupied by the same person. There is one PPR per married couple. A person can only have one PPR at any one time. A PPR can be situated anywhere in the world.
If a person has partly lived in and partly not lived in a property, so much of the gain which is attributable to the period in which it was lived in will be exempt from tax. The final 9 months will be a deemed period of occupation in this calculation.
Often non-resident landlords are selling a property that was lived in while UK resident and let out subsequently. In this situation, the capital gains tax calculation could be complex.
Annual allowance is the amount below which each individual can make in gains a year without liability to capital gains tax. Unlike the personal allowance it applies regardless of residency. The personal allowance is for income tax, the annual allowance is for capital gains.
A UK resident who is not domiciled can claim the remittance basis. A consequence of this is loss of annual allowance. However, this is for UK residents, and more information can be found in the article about domicile.
Unused allowance that is not used by 5 April is not carried forward. Therefore, tax can be saved by making disposals in different tax years. Transfers to spouses occur for no capital gains. Therefore, further savings can be made through inter-spousal transfers prior to eventual disposal of property.
The annual allowance is not available to companies. However, if a gain is made in a company and the company is subsequently dissolved, the annual allowance can reduce exposure to tax on any gain attached to those shares.
For tax purposes, a loss occurs when something is disposed of for less than its value when it was acquired. If an individual has made an allowable loss in the same tax year or a preceding year this is available to reduce gains on disposal of UK property. Note that losses in future tax years cannot be brought back, and therefore, a taxpayer should consider disposal of loss-making assets in the same tax year as that in which the gain has occurred.
There are two main types of loss available to a non-resident:
- A loss which has arisen while the person was UK resident. This can arise on various assets including shares and certain loans that had to be written off. If an asset does not give rise to a taxable gain, such as a home, or a car, then it would not give rise to an allowable loss either.
- Regardless of residence, a disposal of UK property, other than the home, can be set against a gain on UK property. Property in this sense broadly means land and buildings.
The loss is deducted after annual allowance. Therefore, if the gain is less than the annual allowance, the loss can be carried forward intact.
The rate of capital gains tax is determined by the extent to which the individual is a higher rate taxpayer.
Consequently, the personal allowance is a further consideration in the tax calculation.
The personal allowance is available to a UK National regardless of where that person is resident.
For non-UK nationals, the allowance is available to many individuals residing in the country where they also have nationality. Notable exceptions include China, the USA and most low tax jurisdictions (such as United Arab Emirates.) Further information can be found in the following article: https://comanandco.co.uk/uk-personal-allowance-for-non-residents
After three years of non-residency a UK domicile can establish non-domiciled status for the purposes of inheritance taxt. This will ensure that assets which are not situated in the UK are not subject to UK inheritance taxt. More information can be read in this guidance on inheritance tax domicile.
Coman & Co prepares Non-Resident Tax Returns, Tax Returns and Company Tax Returns, and advises on related tax ramifications.