Capital Gains Tax (CGT) for Non Resident Owners of Residential Property

Lisa Spearman, Private Client Partner, considers the key points of the CGT regime as now extended to non residents owning property in the UK.

Many other countries charge tax on the basis of where a property is located rather than where the owner is resident, and it is therefore not altogether surprising that the UK has followed suit.

What are the changes?

As from 6 April 2015, any non resident person (including trusts, deceased estates and companies as well as individuals) disposing of an interest in UK residential property will be subject to UK CGT.

Residential property is specifically defined and includes property which is let as well as owner occupied.

How is the gain calculated?

A taxpayer will have three methods for calculating their taxable gain:

  1. Rebase the deemed acquisition cost to the value of their property as at 5 April 2015.  This is likely to be the most popular option given recent increases in property prices. A professional valuation would be needed and may be tested by HMRC in due course.
  2. Apportion the gain evenly over the period of ownership of the property.  For example, a property owned for five years and sold on 5 October 2017 would be liable to tax on half the gain.  This method would be less attractive than option one if the period after 5 April 2015 witnessed below average growth.
  3. On the total period of ownership so their true overall gain or loss.  This may be a preferred option if there is an overall loss to report.

A number of interactions with other parts of the tax system must be taken into account and complicate matters. There is an overlap with both the special CGT levied for companies owning residential property under the Annual Tax on Enveloped Dwellings (ATED) regime and the rules attributing certain gains from non UK trusts and companies to particular individuals. Specialist advice relevant to those circumstances must be sought.

Are there any reliefs available?

Where a property has been a main residence, or if lettings relief could apply, careful calculations will be needed as there may be an advantage to time apportionment over accepting the normal method.

During the period of non residence there are restrictions on whether the property can be regarded as a main residence principally requiring at least 90 days of occupation in each tax year. With this amount of occupation, an individual’s tax residence status might itself be called into question.

The terms of the relevant double tax treaty will also need to be considered to establish any double tax relief that could be available.

Individuals can benefit from the CGT annual exempt amount (2015/16: £11,100) as can trustees (2015/16: £5,550). Companies cannot, but instead benefit from indexation (inflation adjusted base cost).

Offsetting of losses is possible but they are generally ring-fenced to be available only for the same type of disposal.

Crucially, those who are considering returning to the UK should review whether a sale whilst still overseas is the best overall result bearing in mind the 2015 start date. Once UK tax residence is resumed, the whole of the gain will be taxable.

What rate of CGT will apply?

Assuming there is a taxable gain after reliefs outlined above, the rate of tax will be:

Individuals       18/28%

Trusts               28%

Companies      20/28%

How to report the gain and pay the tax?

There are 30 days, from the date of completion, to make a report to HMRC. Penalties for late reports will be levied, so it is sensible to have the necessary facts to hand to facilitate a prompt report as close to completion as possible.

If you are not already signed up with the UK tax authorities (within UK self-assessment), then the tax is payable within 30 days of completion of sale and HMRC will contact you with a payment date. If you are within self assessment, you must also report the sale (generally determined as the date of exchange of contracts) on your usual tax return and the CGT is payable by 31 January following the tax year end. Where the ATED regime applies there could be three returns to make for the same transaction!

How can we help?

We have the technical and practical experience of advising on all of the tax aspects and the required reporting in this respect, so please do get in touch when a sale is contemplated for any help and assistance you may require. In a sentence, if you are non resident and thinking of disposing of a residential property please talk to us to make sure that all bases are covered and there are no unwelcome surprises!

If you would like further information, please get in touch with me or one of your usual contacts at Mercer & Hole.