Proposed Capital Gains Tax changes wider than expected

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Summary: On 28 March HM Treasury and HMRC published a consultation document setting out their proposals for charging non-UK residents capital gains tax (CGT) on disposals of UK residential property from 6 April 2015. Following the announcements in the Autumn Statement there was an expectation that the new CGT charge would only apply to properties worth more than £2m that were held by individuals and trustees. The consultation document proposals are much wider than expected.

On 28 March HM Treasury and HMRC published a consultation document setting out their proposals for charging non-UK residents capital gains tax (CGT) on disposals of UK residential property from 6 April 2015.  Following the announcements in the Autumn Statement there was an expectation that the new CGT charge would only apply to properties worth more than £2m that were held by individuals and trustees.  The consultation document proposals are much wider than expected.

The charge will apply:

-   to non-UK resident individuals, trustees, certain closely-held fund structures and companies;

-   on the disposal of all UK residential property, including let properties (a few exceptions apply);  and

-   to gains which accrue post 5 April 2015.

Properties that are in the process of being constructed or adapted for use as residential properties will be included within the charge.  The only exceptions are for properties with a communal use, for example halls of residence and care homes.  Unlike for the high value residential property rules, other accommodation for students will not be excluded from the charge.

Perhaps the biggest surprise contained in the consultation document relates to the extension of the CGT charge to non-UK resident companies, given the introduction of the charges on high value residential properties held through companies in April 2013.  The charge will apply to sales of all UK residential properties, including those worth less than £500,000, held by non-UK resident companies.

The charge is to be further extended to cover companies that let residential properties, including those that were relieved from charge under the high value residential properties rules.  The proposal is that different regimes will apply depending on the nature of the business run by the companies.  It appears that where a company has a simple property rental business the sale will be subject to capital gains tax, but where more complex business arrangements are in place a “tailored approach” will be adopted.  It  is not clear is where the line will be drawn.

The consultation document also sets out a potentially significant proposal to change the current relief for main residences which would apply “across the UK CGT system”.  Currently, individuals and trustees have the ability to elect which of their residential properties should attract the relief from CGT.  Two alternative options have been put forward:

-    remove the ability to elect, with the main residence being determined on the balance of all evidence, including such factors as where the taxpayer’s spouse or family live, where mail is sent and registration on the electoral role; or

-    replace the election with a rule that identifies the main residence on the basis of where the taxpayer spends the most time in a given tax year.

Given that this proposal is being made to prevent non-residents electing for their UK residential property to be their main residence, it may be that this change would only apply to them, rather than across the board.

Only the rate of tax payable by individuals is covered in the consultation document.  The government will confirm the rates of tax for other non-UK resident entities at a later date.  The intention is that individuals will pay the same rate of CGT as UK resident individuals: either 18% or 28% depending on whether or not they are higher-rate taxpayers.  In order to identify the rate of tax, the government is suggesting that non-UK resident individuals will need to declare their UK income to ensure that an appropriate level of tax is levied.  This could potentially represent a significant extension of a non-UK resident's reporting obligations.

It is also proposed that a withholding mechanism should be introduced for the collection of CGT on sales by non-UK residents, with an option for the non-UK residents to pay the actual tax due.  The intention is that the CGT should be collected and paid in the same way as stamp duty land tax.  This would mean that solicitors acting on the sale of residential property by non-UK residents would retain a sum equal to the tax and would be obliged to pay that sum to HMRC within 30 days of the sale.

These changes are intended to be an appropriate levelling of the playing field between UK resident and non-UK resident individuals, and arguably it is not out of step with other major economies.  However, the proposals go far beyond those indicated by the Chancellor in the Autumn Statement.

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