UK govt proposals for capital gains tax for non residents goes further than expected
UK government proposals on extending capital gains tax on residential property owned by non residents, including those with second homes, is wider than expected and could be more far reaching than the industry had anticipated, it is claimed.
The plans were announced in the Autumn Statement last year and now the details show that the government is proposing to remove the valuable relief that allows second home owners in the UK to elect, or flip, their primary residence for CGT purposes. The proposal covers both resident and non-resident home owners.
According to law firm Boodle Hatfield it effectively means that non UK corporate owners of residential property will be subject to a two tier approach.
For individual owners, all types of trust are to be included within the scope of the regime, as are non-resident partners in partnerships. Further, and in a departure from the Annual Tax on Enveloped Dwelling (ATED) regime introduced last year for properties over a certain value owned by companies, all gains arising on the disposal of UK residential investment property are to be subject to CGT, as they are currently for UK residents.
‘Going forward non-UK corporate owners of residential property will be subject to a two tier approach. Those who pay the ATED will pay the related CGT charge on all or part of the gain at the usual rate of 28%. In contrast, all other non-resident companies will be subject to a tailored CGT charge at an as yet unknown rate on all gains arising on the disposal of UK residential properties, including those which are owned as part of a property business,’ said Sara Maccallum, a partner and head of the private client and tax team at Boodle Hatfield.
The new CGT charge will only be charged on gains accruing on or after April 2015, the annual CGT exemption will be available to non-residents, and CGT will be payable by non-corporate sellers at the current CGT rates.
The government is, however, suggesting a new method of collecting the tax, a form of withholding tax to operate alongside an option to self assess. Full details are yet to be published, but the principle is that the seller of a property would be identified as a non resident and then would have an option to pay the actual tax due or have the tax levied by withholding, carried out by the solicitor acting for the purchaser. It appears that the tax would then have to be paid within 30 days of completion.
‘This will clearly be administratively burdensome for the purchaser’s solicitors and could further complicate the conveyancing process. A surprising aspect of these proposals is that changes are to be made to the relief that prevents a CGT charge arising on the disposal of an individual’s main residence, which will affect UK residents just as much as non residents,’ Maccallum pointed out.
‘There was always a concern that if main residence relief was going to be available on the sale of a non resident’s home, the non resident could simply elect their UK home as their main residence rather than their non-UK property on which no CGT is payable and therefore effectively avoid paying UK CGT,’ she explained.
‘However, the proposed, and unexpected, solution to this potential problem is to remove for all second home owners the ability to elect which of their homes should be regarded as their main residence for CGT purposes, regardless of the factual position. Instead, the relief would only be available on the property which was, as a matter of fact, a taxpayer's main residence, or on the property that qualifies as such in accordance with a proposed new fixed rule. This is a fundamental change to a widely used relief,’ she said.
‘These proposals are currently being consulted upon with a view to legislation being introduced from April 2015. There is scope for details to change and, hopefully, for some of the potential problems to be identified and ironed out, but it does seem clear that the tax regime for non resident home owners and all second home owners will be very different from next year,’ she added.