Until now, many British expatriates have been able to sell UK property without having to pay any capital gains tax in the UK. This changes from April when new rules come into effect.
The concept of charging UK capital gains tax on the disposal of UK residential property owned by non-residents was first mooted by Chancellor George Osborne in his 2013 Autumn Statement. Following a consultation, the government published legislation on December 10, 2014. The new rules apply from April 6, 2015.
Currently, if you are non-UK resident and remain so for five complete and consecutive UK tax years, gains made on the disposal of UK property are not taxable in the UK. From April, gains will be subject to UK capital gains tax, regardless of how long you have lived abroad.
The new rules apply to non-UK resident individuals and non-resident partners in UK resident and UK non-resident partnerships, companies and trusts. Institutional investors (eg. foreign pension funds) will not be liable.
The rules only apply to residential property, which is defined as “property used or suitable for use as a dwelling”. This includes residential property used as an investment, property that has been rented out and disposals of interest in ‘off-plan’ properties.
The tax charge will be the same as UK residents pay. Therefore, the net gain on your UK property will be added to your other UK source income and taxed at 18% or 28%. This is for individuals; companies pay tax at 20%, or 28% if it falls within the Annual Tax on Enveloped Dwellings. It is also 28% for trusts.
The annual exemption of £11,100 (from April 2015) is available to individuals and partnerships. For trustees it is £5,550.
It is gains arising from April 6, 2015 that will be taxed. The government will allow either rebasing to April 5, 2015 or a time-apportionment of the whole gain, in most cases. You would also have the option to compute the gain (or loss) over the whole period of ownership.
Under UK legislation, an individual’s main home is exempt from capital gains tax, thanks to the “private residence relief”, which is available if certain conditions are met.
Non-UK resident individuals and trustees may be able to benefit from the relief if they meet new qualifying conditions. The provisions also restrict access to the relief for properties located in a jurisdiction where the owner is not tax resident.
This applies both to non-residents disposing of UK property and UK residents disposing of residential property abroad, such as here in Portugal.
From April you can apply the private residence relief to a property if you have resided in it for 90 midnights or more over the tax year. If you own more than one property in a country the 90 days can be spread over the properties.
Therefore, if you live in Portugal and own a UK property, if you spend 90 days in that in the year you sell it, you can nominate it as your principal residence.
This may however have other tax consequences for you. British expatriates always need to pay careful attention to the UK’s Statutory Residence Test rules if they want to ensure that they do not become UK resident for tax purposes.
If you spend 90 days in the UK you will not meet the automatic overseas or UK residence tests, and will need to apply the “significant ties” test to determine whether you are tax resident or not. Spending this much time in the UK will be one connecting factor and the availability of a residence another, and so this could have an impact on your tax planning. You therefore need to be very careful and seek specialist advice to weigh up the pros and cons and look at your tax situation as a whole.
Another important consideration is that the gains made on worldwide property are also taxable in Portugal, so you need to understand the local rules and how the Portugal double taxation treaty works.
When considering the tax efficiency of your UK property, if you rent it out bear in mind that you may in future lose the UK personal allowance on the income. This is something the UK government is considering, though it has delayed making a decision to allow time for further consultation. If the change does go through, it would mean that rental income which may have not attracted UK income tax until now could be taxed.
Tax involving two countries can be complicated. You need personalised professional advice to ensure you have all the necessary facts and establish the solution that works best for your situation and objectives.
Tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; an individual is advised to seek personalised advice.
By Gavin Scott
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Gavin Scott, Senior Partner of Blevins Franks, has been advising expatriates on all aspects of their financial planning for more than 20 years. He has represented Blevins Franks in the Algarve since 2000. Gavin holds the Diploma for Financial Advisers. | www.blevinsfranks.com