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The UK’s unique exemption from Capital Gains Tax (CGT) for non UK residents has been reformed with the government’s realisation that tax should be paid on gains arising from the sale of UK residential properties. Currently most foreign property owners in the UK are not subject to CGT and this article outlines the changes to the UK’s CGT regime for non-residents with effect from 5th April 2015.
Which properties are included?
Unlike the Annual Tax on Enveloped Dwellings (ATED) system, which currently taxes gains on the sale of residential property worth more than £2 million owned by “non-natural persons”, there is no starting threshold value and all residential properties are potentially liable to CGT if sold by a non-UK resident at a gain.
Non-residents include individuals, partnerships, companies, trusts and offshore funds. Pension funds are excluded from this charge.
Communal residential properties will not be within the charge to CGT i.e. nursing, residential care homes, boarding schools, hospitals, etc.
Commercial properties such as factories, shops, offices etc are also not within the scope of this new legislation.
However rental properties are specifically included in the charge so overseas landlords will be required to pay CGT on gains arising from disposals after 5th April 2015.
What is the tax rate?
Non-resident individuals will be charged between 18% - 28% depending on the individual’s total UK income and gains. They would also be entitled to the annual CGT exemption which is currently the first GBP 11,000 of total annual gains.
The rate applicable to companies has not been determined yet but the UK tax authorities are unlikely to apply the same rate and reliefs that are currently available to a company that is resident in the UK.
However, the authorities need to ensure that EU companies are not discriminated against in comparison to UK companies.
Proposed collection of taxes
The options available are:
- Report the gain in a similar format to self assessment ATED.
- Letting agents could withhold an amount from the sale proceeds.
- Solicitors acting on the sale may be required to withhold a percentage of the sale proceeds
Each of the above options has its own problems in ensuring that the correct tax is paid by a non-resident.
Furthermore, if you are non-resident in the UK, the country where you are resident may require you to report your UK gain, even if tax has been paid in the UK.
The following table provides a summary of the current and future CGT position on properties owned in the UK:
Forms of ownership | Current CGT | New CGT |
Direct ownership by individual (UK) | CGT payable | CGT payable |
Direct ownership by individual (Non-resident) | No CGT | CGT payable, rate dependant on income and gain
|
Company (UK) | CGT payable | CGT payable |
Company (Non-resident) | No CGT | CGT payable, rate dependant on income and gain
|
Other offshore entity | No CGT | CGT payable, rate dependant on income and gain |
Conclusion
There are certain measures that non-residents may be able to take prior to 5th April 2015 to mitigate the potential tax burden. Anyone seeking to purchase a property in the UK will need to factor in a CGT estimate when making an investment.
Article supplied by Lawrence Grant