UK capital gains tax on non-UK resident owners of UK real estate?

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Summary: Does the Government intend to impose UK capital gains tax on non-UK resident owners of UK real estate? The press seem to think so – but:- is it likely?; and- perhaps more importantly, would existing gains be taxed?

CGT on non-UK resident owners of UK real estate – is it likely?

Finance Act 2013 extended CGT to non-resident companies owning UK residential real estate worth more than £2m+. This was a significant departure from the UK’s previous CGT regime which did not tax non-residents on gains.

Having introduced this charge on ‘non-natural non-residents’ (e.g. non-UK companies) it would, arguably, be fairer if CGT was extended to all non-resident owners of UK real estate (natural and non-natural persons) (e.g. to include trusts and individuals), provided the conditions and reliefs were the same. Such a charge would not be out of step with other jurisdictions; many other countries charge non-resident property owners to CGT.

What reliefs or exemptions might apply?

Re-basing?

Will assets be re-based so that only any future increase in value would be subject to CGT?

The CGT charge on non-resident companies disposing of UK residential real estate for more than £2m (introduced by Finance Act 2013) only applies to gains accruing post-5 April 2013. As this possible new charge would be in parallel to that, we would expect gains which had already accrued to be exempted from CGT.

In the absence of re-basing, or provisions taking pre-implementation gains out of the charge to CGT, the entirety of any gains realised on properties since acquisition would potentially be subject to CGT. Where a property has been held for many years (or decades) this could result in a very significant CGT charge. Therefore, in some cases, clients may wish to consider re-basing assets before any new charge comes into effect to avoid historic gains being subject to tax, but this will depend on the circumstances.

Charge restricted to high value residential real estate used as a home?

Will any charge be limited to gains realised on high value UK residential real estate which is used by the non-UK resident individual as a home?

Again, if there is to be a level playing field, any new charge would have to be limited in the same way as the new CGT charge on non-resident companies disposing of UK residential real estate.

To ensure fairness:

  • any new charge should only apply to disposals of residential real estate for more than £2m;
  • any new charge should not apply where the property is held as part of a property trading or development business, or has, throughout the relevant period of ownership, been let on a commercial basis to a third party;
  • in addition, if a non-resident individual only has one home in the UK we would expect that that would still often be relieved from CGT by virtue of the existing principal private residence relief.

The Government has made it clear that it does not like ‘enveloped’ properties (properties held in a corporate vehicle). The package of measures introduced in Finance Act 2013 was intended to encourage de-enveloping. It would, therefore, be odd if the reliefs from CGT available to non-resident companies holding UK real estate were not available to non-resident natural persons brought within a charge to CGT as this would run counter to the recent changes and make it advantageous to have an ‘envelope’.

We would hope (perhaps in vain) that the Government consults fully on any further extension of the CGT regime and does not allow tax policy to be dictated by media pressure and political agendas.

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