For a long time, UK property owners who lived permanently overseas did not need to worry about UK capital gains tax when selling the property. However, recent changes have seen non-residents come into firing range for this tax.
If you own UK property, make sure you understand the tax implications and what you can do to minimise taxation and take advantage of tax-efficient opportunities in Portugal.
What has changed for non-UK residents?
Since April 2015, if you are one of many British expatriates who owns property in the UK, you will face ‘non-resident capital gains tax’ (NRCGT) when the time comes to sell it.
Initially, this only applied for UK residential property but, in April 2019, gains on UK commercial property, land and “property-rich entities” also became taxable. As a result, NRCGT is now chargeable on the sale of most UK real estate or land, whether owned directly or indirectly (excluding Scotland).
How much is non-resident capital gains tax?
Rates are 18% or 28%, but only on gains arising since the date the change came into law. So, for residential property, charges are based from the market value as at April 6, 2015; for other real estate or land, it is the revalued amount as at April 6, 2019.
Even if no tax is due, non-residents must file a NRCGT tax return within 30 days of selling a UK residential property to avoid penalties.
Who is liable for non-resident capital gains tax?
NRCGT applies to non-UK resident individuals, as well as non-resident partners in property-owning partnerships and trusts. Liability remains no matter how long you have lived outside the UK, even if you never intend to go back.
Since April 2019, disposals of UK residential property owned through a non-resident company structure (or collective investment vehicle) attracts UK corporation tax instead of capital gains tax.
What reliefs are available?
This year’s UK capital gains tax allowance is £12,500 for individuals and partnerships and £6,000 for most trusts. Furthermore, you may be eligible for UK private residence relief (PRR) on the sale of a residential property that is, or has been, your only or main residence.
UK private residence relief rules
You can apply PRR to a property if it is your main home and you have lived in it for 90 days or more over the UK tax year. Both non-residents selling UK residential property and UK residents selling residential property overseas are eligible.
If you are Portuguese resident and spend at least 90 days in a property you own in the UK, you can therefore nominate this as your principal residence – but take care. While this allows you to avoid UK capital gains tax, you may be seen as UK resident for tax purposes, making your worldwide income liable for UK taxes. You should take specialist advice to consider your personal circumstances and tax situation as a whole.
Main home relief in Portugal
For Portugal residents, capital gains tax on UK property is also payable here, although the gain on a main home is exempt if the entire proceeds (net of any mortgage) are re-invested in another main home in Portugal or another EU/EEA country. This must be done within 36 months after the sale (or 24 months before), otherwise any tax payable becomes due alongside penalties and interest for late payment.
While this currently means that Britons moving from a Portuguese home to a UK one should be exempt, this is on track to change post-Brexit.
New reinvestment relief
Retiree Britons can benefit from a relief introduced earlier this year, which could be particularly attractive when downsizing. Now, if you are either retired or aged over 65, you receive an exemption if you reinvest some or all the gain from a main home into an eligible insurance contract or pension fund within six months of sale.
As well as tax efficiency, this approach can unlock other benefits such as multi-currency and estate planning flexibility, so explore if this might suit you.
Capital gains tax in Portugal
Where capital gains tax is payable on property, Portugal residents are charged on 50% of worldwide gains at the scale income tax rates up to 48%, with inflation relief after two years’ ownership.
However, if you qualify for the non-habitual residence (NHR) tax regime, gains on the sale of a UK home are not taxable in Portugal for your first 10 years here.
Ultimately, careful, early planning is crucial when selling property to establish the best approach and avoid paying unnecessary taxes. Talk to a cross-border tax specialist to take advantage of available reliefs and tax-efficient opportunities, not only for your property, but to ensure all your finances are suitably structured for your life in Portugal.
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; individuals should seek personalised advice.
By Mark Quinn
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Mark Quinn, Partner of Blevins Franks.