On 28 November, the Government published further details of the new capital gains tax (CGT) charge for non-UK residents on disposals of UK property, which will apply from April 2015:
- the charge:
- will apply on disposals of residential property only;
- will apply to properties of any value and to let properties as well as owner occupied properties;
- will apply to non-resident individuals, trustees, certain closely-held fund structures and some non-resident companies;
- will not apply to diversely held institutional investors – a “narrowly controlled company” test will be introduced to limit the scope of the new charge to companies that are the private investment vehicles of individuals, families or small groups of individuals or families;
- will apply to non-residents who are partners on the disposal of residential property held by a partnership;
- non-resident companies within the charge will be subject to tax on the gains on disposal at 20% - this mirrors the UK corporation tax rate which will apply to UK resident companies from April 2015;
- non-resident individuals and trustees will be taxed at 18% or 28% (28% above available lower rates);
- non-resident individuals and trustees (where a beneficiary is in occupation) will be able to benefit from principal private residence relief (PPR relief) to exempt the gain from CGT;
- only gains accruing post 5 April 2015 will be subject to the new CGT charge - non-residents who are subject to the charge will be able to elect to rebase to 5 April 2015 (this is the default position if no election is made) or time-apportion the whole of the gain realised on the disposal;
- losses realised on the disposal of UK residential property by non-residents will be ring-fenced and can only be offset against gains on UK residential property arising to the same person in the same tax year (or carried forward for set-off against such gains). If the non-resident subsequently becomes UK resident any losses carried forward can then be used against general gains;
- the ATED-related CGT charge will remain – and will remain at 28%;
- non-residents who are within the charge must report to HMRC within 30 days of the date of completion and make a payment on account of the CGT due.
PPR relief: new conditions to qualify
PPR relief exempts the gain realised on the disposal of a person's only or main residence from CGT. Where a person has more than one residence he can currently elect which is to be treated as his main residence for the purposes of PPR relief. If the rules remained unchanged this would mean that a non-resident subject to the new CGT charge would be able to elect for their UK home to be treated as their main residence and so avoid CGT on any gain on its disposal.
The availability of PPR relief is, therefore, being restricted, primarily for non-residents but the changes will also impact on UK residents. From April 2015 a person’s residence will not be eligible for PPR relief for a tax year unless:
- the person making the disposal was resident in the country in which the property is located in that tax year; or
- the person spent at least 90 midnights in that property (or properties in the same country) in the tax year.
Where the '90-midnight rule' is not met the person will be treated as being absent from the property for that tax year.
This means that non-residents will only qualify for PPR relief on their UK home if they spend 90 midnights at that home (or another UK home) each tax year. However, doing so will result in the individual having another 'UK tie' for the purposes of the UK's statutory residence test and so may tip the person into being treated as UK tax resident and consequently potentially subject to UK tax on their worldwide income and gains. Careful planning and meticulous record keeping will be required. For further details see the BLP tax residence app.
For married couples/civil partners occupation by one spouse/civil partner will be regarded as occupation by the other. This means that where one spouse is resident and the other non-resident, the non-resident spouse's share of the UK home can qualify for PPR relief without the non-resident having to met the '90-midnight rule'.
For UK residents it will now be more difficult to qualify for PPR relief on an overseas property.
ATED-related CGT charge
The CGT charge on ATED-related gains which applies on disposals of UK residential properties by UK and non-UK resident companies, partnerships (with a corporate member) or collective investment schemes will continue to apply. ATED-related gains are gains which accrue in any period during which the ATED (Annual Tax on Enveloped Dwellings) was payable in respect of the property interest being disposed of. ATED-related gains will continue to be subject to tax at 28%.
The ATED and the ATED-related CGT charge do not apply if the property has at all times been let to third parties; neither do they apply to individuals or trustees (corporate or individual) (however the new CGT charge will apply on gains accruing post April 2015).