With all the noise around the UK pension reforms this year it is easy to forget that there was another big change affecting everyone here who owns property in the UK, and those in Britain planning a move to Portugal. British expatriates now have to pay capital gains tax in the UK when they sell UK property.
Who is taxed?
Until April 6, 2015, if you were non-UK resident for five consecutive UK tax years, you were not taxed in the UK on the gains made when you sold UK property. Now, if you are one of the many UK nationals resident in Portugal who owns property in the UK, you will have to pay tax there if you sell it.
The new rules apply to non-UK resident individuals, non-resident partners in UK resident and UK non-resident partnerships, companies and trusts. They apply no matter how long you have lived outside the UK and even if you never intend to go back.
What is taxed?
The new tax only applies when you sell UK-based residential property, which is defined as “property used or suitable for use as a dwelling”, regardless of whether anyone is living in it or not. This includes:
▪ residential property used as an investment
▪ property you have rented out
▪ multiple dwellings that are sold at the same time
▪ any interest in ‘off-plan’ properties.
You only have to pay tax on gains arising from April 6, 2015. In most cases you can choose whether to rebase the value of your property to April 5, 2015, or time-apportion the gain. You also have the option of computing the gain over the whole period of your ownership.
What is the charge?
The tax charge is the same as that paid by UK residents. The net gain on your UK property is added to any other UK-source income you have and taxed at 18% or 28%, depending on whether your UK income puts you in the basic or higher-rate tax bracket. Companies pay tax at 20%, or 28% if it falls within the Annual Tax on Enveloped Dwellings (ATED). It is also 28% for trusts.
What reliefs are there?
Individuals and partnerships have an annual allowance of £11,100 and trustees £5,550 (for 2015/16).
Over and above this, under UK law, if you meet the conditions for private residence relief (PRR), you do not have to pay capital gains tax on your main home. Both non-residents selling UK residential property and UK residents selling residential property here in Portugal may still be able to get this relief as a non-UK resident if they meet new qualifying conditions.
You can apply PRR to a property if you have lived in it for 90 days or more over the UK tax year. If you own more than one property in a country, the 90 days can also be spread over the properties. If you are UK resident, you can also apply the relief to a property you own here in Portugal, if you spend 90 days in it.
Conversely, if you live in Portugal and spend 90 days in a property you own in the UK, you can nominate this as your principal residence. Although this allows you to avoid capital gains tax, you may be seen as UK resident for tax purposes under the UK’s Statutory Residence Test.
This means you would have to pay tax in the UK on your worldwide income. You therefore need to seek specialist advice to consider your tax situation as a whole.
The UK/Portugal tax treaty
Residents of Portugal are subject to Portuguese capital gains tax on their worldwide real estate gains. So a Portuguese resident selling a UK property would be liable to tax in both countries. You will not pay tax twice, but you need to understand the interaction of the UK and Portuguese tax regimes under the double taxation treaty.
For those eligible for the non-habitual resident regime, a gain is exempt in Portugal if it may be taxed (under tax treaty rules) in the country of source. The UK/Portugal treaty says that “immovable property” gains may be taxed in the country where the property is located. As the UK has taxation rights, the gains are exempt in Portugal under the non-habitual resident (NHR) regime. The gains are added into your overall tax bill, and then the tax on this income and gains is deducted from the overall liability. Effectively, this means the tax rate on any income or gains that are directly taxable in Portugal may be increased.
Tax involving two countries can be complicated so you should always seek professional advice to make sure you get 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
|| [email protected]
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
Learn more about Blevins Franks