Currently, UK residents are liable to CGT when selling or transferring a property that is not their main residence but non residents are not. The Government is extending the CGT charge to non UK resident individuals, trustees, partners and some companies which dispose of UK residential property from 6 April 2015 onwards.
Summary of charge
- In most cases the gain or profit will only be calculated from 5 April 2015. Most valuations will be rebased to 5 April 2015 so only gains arising from 6 April will be caught. Alternatively, it is possible to time apportion the gain or to calculate this over the whole period of ownership.
- Like UK residents, non resident individuals will have access to an annual personal allowance (£11,100 for 2015/16).
- The tax rate will be the same as for UK residents. For individuals, this will be 18% or 28% depending on their overall UK income and gains arising in the tax year. Non resident companies will be subject to tax on gains at 20%.
- The ATED (Annual Tax on Enveloped Dwellings) related CGT charge remains at 28%.
- Relief is given where the property qualifies as the owner's only or main residence (Principal Private Residence Relief) but only if the occupancy test is met which requires the owner and/or their spouse/civil partner to spend at least 90 midnights at the property during the tax year.
- Where a property is transferred to a "connected party" (usually a family member), this is taken to be at the market value even if no payment is made for the property. A transfer by a parent to a child, even if no money changes hands, will be taken to be at market value and therefore potentially subject to a charge if the value has increased from 5 April 2015.
- The disposal of the property needs to be reported to HM Revenue & Customs within 30 days.
- Losses incurred on the sale or transfer of UK residential property can be offset against gains on UK residential property arising in the same tax year or carried forward to be offset against gains arising.
We are now just a few days away from this new charge applying to non residents. There is still some planning which might be considered however to minimise the potential charge which will arise on the sale or transfer of property.
For non residents considering either investing in UK residential property for the first time or for those who already own property in the UK, it might be well worth considering some of the following:
- For non residents who already own property in the UK, it would be sensible to consider instructing a valuation of the property as at 5 April 2015 given that this will generally form the base cost for working out the gain and the subsequent tax due when the property is sold. This helps to provide clarity and certainty for the future.
- It is also well worth existing owners reviewing the ownership position to make sure that they are not missing out on an opportunity to restructure the ownership to minimise the future tax charge. As the legislation allows for the value of properties already owned to be rebased to 5 April 2015, it might be worth considering a transfer around that date before the property increases in value.
- Careful consideration should be given to how title is taken to the property, whether in relation to a new purchase after 6 April or for existing property owners. Professional advice tailored to individual circumstances is recommended as there will be considerations wider than CGT such as income tax and inheritance tax. While a married couple might consider taking title in joint names to benefit from two annual exemptions for CGT, this may not be the most efficient way of structuring the ownership from an income tax perspective if the property is going to be let. It may be, for example that one spouse is entitled to an income tax allowance or that one has a higher level of UK income which pushes them into a higher income tax bracket. It is important that individuals don't lose sight of the bigger picture therefore when considering CGT planning.
- Many non residents buy UK property for a child to live in while they attend university in the UK. If the property is to be the child's main residence for the duration of the property ownership (and assuming they satisfy the 90 midnight rule as set out above), if the child were to be the sole owner of the property, principal private residence relief is likely to be available so consideration might be given to taking title in the child's name. That of course brings other considerations - such as protection and gifting issues (to include potential inheritance tax implications) and advice is required to ensure this is the appropriate thing to do.
- It is important that careful records of expenses relating to the purchase and sale of the property are kept as well as records of any expenditure which is incurred in terms of improving the property. Receipts should be kept as may need to be produced to HM Revenue & Customs at the time of reporting the gain or loss on the sale of the property.
For non residents who already own property in the UK, it is sensible for their position to be reviewed now to check if there are any steps which can be taken to reduce the potential tax charge in the future. For those looking to buy UK residential property after 6 April, tailored advice should be sought prior to the purchase.