Capital Gains Tax charge on non-residents owning UK situated property

First of all, a note from this writer … As a resident independent financial advisor based in Portugal, it is essential that I keep tabs on changes to international financial legislation. With UK property values having increased by over 20% in the last year, the curious advantage of qualifying for an exemption to UK Capital Gains Tax (CGT) will disappear from April 6 2015.
With less than a year to go, there is still time to plan in order to mitigate any future CGT liability. I have researched innumerable articles on this subject and have inserted this particular article, mainly because it is one of the best written pieces I have found to date. I have approached the firm and, in particular, the individual responsible who, as a well established specialist tax adviser, is available for comment. If you would like to make contact with the author, please feel free to call me at the offices of Eurofinesco on 289 561 333 and I will put you in touch.
HM Revenue & Customs (HMRC) intends to introduce a charge to Capital Gains Tax (CGT) on property disposals made by non-residents from April 6 2015. As part of the process of introducing such legislation HMRC have issued a Consultative Document setting out their view on how such a charge will be levied. Their current view may be summarised as follows:

Who is affected?

Non-UK tax residents who own property situated in the UK.

What property is affected?

HMRC intend to focus the extended CGT charge on property used or suitable for use as a dwelling i.e. a place that is currently or has potential to be used as a residence. In addition, residential property used to generate income from lettings will also come within the charge to CGT. The charge will not extend to properties used as offices, industrial buildings or for those in communal use such as school and student halls of residence or care homes.

Does it matter how the property is owned?

No! It is proposed the charge will not only apply to property owned by individuals but also to that owned through Partnerships and Trusts. Furthermore, the government are minded to extend the charge to all UK residential properties sold by non-resident corporate envelopes so that all properties are within the scope including those valued below £500,000. However, HMRC will ensure that the full-Annual Tax on Enveloped Dwelling (ATED)-related CGT charge only applies to those properties that are also subject to the ATED charges each year. Such a charge will also be extended to bringing some non resident investment companies into the UK tax system.

What rate of tax will apply?

The rate of tax charged will mirror that levied on UK individuals. To ensure compliance, HMRC intend to introduce a new withholding tax at the point when a non resident disposes of UK residential property. HMRC’s preference is to introduce a formal withholding tax that operates alongside an option to self assess and report the tax due.

How will the charge be calculated?

HMRC have suggested that the charge to CGT will only apply to increases in a property’s value post April 5 2015 .So it appears to be necessary to revalue property at that date and accept any subsequent increase in value will be chargeable to CGT.

Can a Claim to Private Residence Relief succeed?

HMRC recognise there may be situations where the Principal Private Residence Relief (PPR) may be due and will make PPR Relief available to non-residence in certain circumstances. For example where a person emigrates from the UK and then sells what was their main residence. If more than one property is owned, HMRC are considering changing the election rules. In line with the current PPR process taxpayers may be asked by HMRC to demonstrate their entitlement to relief. This will be achieved in one of two ways:
A. by removing the ability of a person to elect which residence is their main residence for PPR purposes and instead relief would be limited to that property which is demonstrably the person’s main residence. In other words, the person’s main residence is determined by the balance of all the evidence, including factors such as the address of where the taxpayer’s spouse or family lives, mail is sent and that is where they are also on the electoral role. Or
B. replace the ability to elect with a fixed rule that identifies a person’s main residence e.g. that in which the person has been present the most for any given tax year.
Depending on the test that is devised this may mean that taxpayers may have to keep or maintain different or additional records. The first option would allow some flexibility for different circumstances but this could result in some uncertainty.
The second option would be a definitive test which would provide more certainty but might offer less opportunity to deal with particular circumstances. It is not intended that the other reliefs available by reference to a person’s main property, for example absence reliefs etc., would be available. The rate of tax is yet to be confirmed but would be in line with the current rates of CGT applying to UK residence as well as extending the annual CGT exemption to such non-residence.

What needs to be done now?

Although only currently a proposal and apart from any minor amendments, the charge to CGT will come into effect from April 6 2015. Therefore it is recommended any non-UK tax resident person who owns property in the UK now reviews their potential exposure to this potential tax and take steps, if possible, to mitigate exposure to it.
This article is intended to provide a general review of certain topics and its purpose is to inform but NOT to recommend or support any specific course of action.
This article represents our interpretation of current and proposed legislation and HMRC practices as at the date of publication. These may change in the future.
By Raoul Ruiz Martinez
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Raoul Ruiz Martinez is a resident and independent consultant for Finesco Financial Services Ltd., Glasgow and advises clients on private financial matters in both the UK and throughout Europe under the MiFID regulation. Finesco Financial Services Ltd is authorised and regulated by the Financial Conduct Authority (FCA). Some of the services provided are not regulated by the FCA because they are not included within the Financial Services and Markets Act 2000. | 289 561 333