Extension of capital gains tax to non-residents – consultation released
A consultation document has been released by the Government setting out its plans to implement a capital gains tax (CGT) charge on the disposal of UK residential property by non-residents. The proposed charge will be effective from April 2015 and applies only to gains arising from that date. The consultation is due to close on 20 June 2014.
Under the current regime, the disposal of residential property situated in the UK by a non-resident individual is not subject to UK capital gains tax. Until recently, non-resident companies were similarly treated. However, the Finance Act 2013 introduced new rules (the annual tax on enveloped dwellings (ATED)-related CGT extension), effective from 6 April 2013, that extended the scope of UK CGT. ATED-related CGT applies to the disposal by 'non-natural' persons, such as companies, of residential property valued in excess of £2 million. The legislation applies such that only gains accruing after 5 April 2013 will be subject to CGT at a rate of 28%. Normally, gains are time-apportioned to determine the post-5 April 2013 gain. Legislation will be introduced under the Finance Bill 2014 to reduce the threshold at which CGT applies to £1 million from 1 April 2015 and to £500,000 from 1 April 2016.
In contrast, where a UK resident individual disposes of a residential property which is not their main residence, any gain arising will be subject to CGT. Similarly, were the disposal is made by a UK resident company, any such gain would be assessable to UK corporation tax at a rate of up to 21% (reducing to 20% from 1 April 2015). It is the opinion of the Government that the taxation of non-residents under the current UK tax regime is not fair. A consultation has therefore been issued which sets out the Government's proposed approach to introducing a charge on non-residents disposing of UK residential property with the view of making the taxation of non-residents comparable to that of UK residents.
When will the proposal become effective? As announced in the Autumn Statement 2013 and confirmed in the consultation document, the proposed extension of CGT to non-residents will come into effect in April 2015 and will apply only to gains arising from that date.
What property will be caught?
Similar to the ATED-related CGT extension, the proposed charge is to target UK residential property used or suitable for use as a dwelling. This will include a place that currently is, or has the potential to be, used as a residence, as well as property that is being constructed or converted for such use. There will be exemptions available for accommodation that is provided for communal purposes, e.g. accommodation at boarding schools and care homes.
However, other than those specifically exempted, it is proposed that the charge will apply to all other residential property. This is in contrast to the ATED-related CGT charge which is subject to a threshold of property with a value in excess of £2 million (reducing to £500,000 by 1 April 2016).
What ownership vehicles will be caught? The proposed CGT charge will apply to all common types of ownership.
Where a residential property is disposed of by a partnership, the partnership itself will remain transparent for tax purposes. Therefore the proposed charge will apply to any non-UK resident partners on their share of gains arising from the disposal of residential property.
The consultation document suggests that where residential property is disposed of by a non-UK resident company, the associated gain will be subject to a 'tailored' CGT charge. The consultation document remains vague as to the mechanics of this proposed charge and how it will interact with the existing ATED-related CGT provisions. The consultation suggests that where the latter provisions apply, and the disposal does not qualify for a specific exemption, the gain will be subject to CGT at the rate of 28%. However, should the disposal qualify for an exemption under those provisions, rather than not being taxed at all, the gain would be subject to the proposed tailored charge. The implication of this is that CGT will apply to all disposals of residential property, even where such property is let out commercially. In view of the above, we are speculating that, in order to prevent the ATED-related CGT provisions becoming obsolete, the rate of the 'tailored' charge for non-resident companies is likely to be less than 28%. This would allow for the Government to maintain the incentive for taxpayers to “de-envelope” and/or avoid corporate property-owning structures going forward.
Real Estate Investment Trusts (REITs) REITs are tax-advantaged investment companies or groups that hold real estate. It is proposed that foreign REITs will not be subject to the extended CGT regime where they are equivalent to UK REITS. Furthermore, the disposal by a non-resident of investments in both UK and foreign REITs should not be subject to the proposed charge.
Where residential property is disposed of by the trustees of a non-resident trust, the proposed CGT charge will apply.
The disposal of shares or units of a fund which invests in UK residential property by a non-resident will not be within the scope of the proposed CGT charge. However, there will be certain tests introduced in order to avoid the potential for abuse by closely held funds.
At what will CGT be charged?
Where the residential property is disposed of by a non-resident individual, the associated gain will be taxed in the same way as if aa UK resident individual had made the disposal. The non-resident individual will qualify for an annual exempt amount (£11,100 for 2015/16), and the applicable tax rate will be either 18% or 28% depending on their other UK income and gains. Therefore, it is suggested that non-UK resident individuals will need to declare their UK income and gains in order to determine the applicable rate of tax. This could potentially significantly increase the reporting obligations of non-resident individuals who might not otherwise be required to file annual returns. The consultation document has stated that the rate applicable to the other forms of ownership caught by the proposed charge will be released at a later date. However, it has been suggested that any losses incurred by a non-resident company disposing of residential property may be offset against future gains arising on residential property.
How will the tax be collected?
The consultation document has suggested that any tax due under the proposed CGT charge is to be collected by way of a withholding tax mechanism. The taxpayer would subsequently have to report the transaction to HM Revenue and Customs (HMRC) where any differences in the actual tax due will be settled. The taxpayer could alternatively opt to pay the actual tax due as opposed to incurring the withholding tax. The process would therefore operate in a similar way to that of stamp duty land tax, whereby the tax would be withheld by the solicitor or agent dealing with the disposal. They would then be required to pay the tax over to HMRC within 30 days.
Principal Private Residence Relief (PPRR)
Currently PPRR has the effect of making gains arising from property occupied by individuals as their main residence exempt from CGT. However, where individuals own and occupy a number of properties, they are currently able to elect which is to be treated as their main residence. Without changes to the rules, non-resident individuals could simply elect for their UK home to qualify for PPRR to avoid a UK CGT charge arising. Therefore, it is proposed that the election mechanism will be removed for everyone (it will not be possible for the Government to discriminate between residents and non-residents). This would be therefore be of interest to UK resident individuals with second homes. Implications of the proposal:
The introduction of the proposed CGT extension will have significant implications for non-residents who currently, or expect to, hold residential property situated in the UK.
Existing property owners may need to consider whether investment in residential property remains the investment of choice, given that any future gains may be subject to tax at the rate of up 28%.
Investors in UK residential property will need to carefully consider how such investments should be structured in future. As the proposed charge is likely to apply to a number of ownership structures it may be, for example, that the reduced inheritance tax exposure associated with certain forms of ownership will mean that such structures remain tax efficient for holding residential property in the future.
The proposals incorporate a wider scope than many people anticipated following the original announcement by the Chancellor. However, the Government will receive feedback as part of the consultation process and so the mechanics of the proposed CGT extension may yet be subject to significant changes.
Always take professional advice when deciding your tax planning or investment strategy. The contents of this article are intended for general information purposes only and shall not be deemed to be, or constitute advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article. April 2014 Harbour Key Limited © All rights reserved