The UK government has published its consultation document proposing how the new capital gains tax charge on residential property owned by non-UK residents could work.
The concept of charging UK capital gains tax on the disposal of UK residential property owned by non-UK residents was first mooted in George Osborne’s 2013 Autumn Statement.
The initial consultation regarding this capital gains charge was published on 28th March 2014, and closes on 20th June 2014. Once the responses have been digested, we expect draft legislation will be produced for further consultation.
The proposals within the consultation document are outlined below, but may not survive the process, or may be changed slightly or significantly. This is only a proposal for how the law might operate.
The consultation is based on three principals:
- Fairness – to equalise the tax treatments of UK residents and non-UK residents that make gains on disposal of UK residential properties.
- Sustainability – to ensure that the new regime is robust and not susceptible to abuse.
- Simplicity – to minimise any complexity in applying the new regime.
Who is to be taxed?
The UK Government believe it is only fair that non-UK residents should pay capital gains tax on disposal of residential property as UK residents do. The proposed charge covers non-UK resident individuals, and non-resident partners in UK resident and UK non-resident partnerships, companies and trusts.
Certain exclusions will apply. Pension funds are not expected to fall within the scope of the tax, nor Real Estate Investment Trusts or Collective Investment Schemes that fulfil certain criteria.
What is to be taxed?
This is not made completely clear, but it looks like only gains arising from 6th April 2015 on disposals of UK-sited residential property will be taxed. UK residential property is defined in the consultation as “property used or suitable for use as a dwelling i.e. a place that currently is, or has the potential to be, used as a residence”. This includes UK-situated residential property used as an investment, and disposals of multiple dwellings at the same time.
Gains arising on property designed and used for communal purposes will be excluded from the charge.
What about losses?
There is nothing specific in the consultation regarding losses arising to individuals. It does however refer to losses made by non-resident companies on disposal of UK residential property, which can be offset against gains on future disposals.
What reliefs will be available?
Principal Private Residence relief will apply against a gain where the property has been used as the main home in the past. It is unlikely to be available to set against the whole gain as, by definition, a non-resident is not living in the UK and so not living in the property as a main home. Evidence may be required to prove the property was used as the main home for the period for which the relief is claimed.
At present it is possible, where two or more properties are owned, to elect which one to be considered the Principal Private Residence. To avoid non-residents who use their UK properties for part of the time making such an election, it is likely that the election will be withdrawn or modified.
The annual exemption (£11,000 from 6th April 2014) will be available to individuals and business partnerships (as they are taxed on their share of the gain of the underlying asset).
What is the tax charge?
The tax charge is envisioned to be equivalent to that which a UK resident would pay. Currently, all net gains arising in the relevant tax year (after losses and the annual exemption are deducted) are added to income, and any part of the gain falling within the basic rate band is taxed at 18%, while that falling above is taxed at 28%.
Non-residents will only be able to deduct losses on UK property, either arising within the same UK tax year or carried forward from a previous year (from April 2015). The net gain on UK residential property will be added to their UK-source income and taxed at 18% or 28%. It is not clear how this will interact with income taxed in another country under a double tax treaty.
A withholding tax is expected to be applied to the proceeds of sale to ensure that tax is paid on the disposal at the time. The amount of tax payable/refundable would be corrected later through the tax return. It may be possible to pay the correct tax at the date of sale if the individual concerned knows their UK-source income for the year.
Remember that you cannot think of UK tax in isolation. You also need to consider local taxation in your country of residence and how the two regimes interact. Seek specialist advice.
31 March 2014
Tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; an individual is advised to seek personalised advice.