Subject to certain reliefs and allowances, UK residents are liable to Capital Gains Tax (CGT) when they sell capital assets (including property), whether these are situated in the UK or overseas.
In the past, non-residents who have been absent from the UK for five years have generally been exempt from CGT, even on their UK assets. From 6 April 2015, these rules have changed, so that non-residents owning UK residential property are subject to CGT. This is now known as NRCGT – non-resident capital gains tax.
Background to the change
In the Autumn Statement of 2013, the UK Government stated that the law confirming that non-residents are not liable to UK CGT on disposal of UK assets was something of an anomaly compared to the stance taken by many of their European neighbours. Announced was a clear desire to tax UK property gains for such individuals and, following the 2014 Budget which initiated a short period of consultation, the law changed for the start of the 2015/16 tax year.
This change applies only to UK residential property. Other UK situs assets remain outside the scope of CGT. Also, this remains out of kilter with income tax and inheritance tax, where non-residents with UK source income and situs assets are subject to these taxes.
Calculating the gain
Only the proportion of the overall gain that relates to the period after 5 April 2015 is chargeable, and this can be calculated in one of two ways, at the choice of the taxpayer. Option one, ‘re-basing’, requires the sale value to be reduced by the open market value on 5 April 2015. Option two, ‘apportionment’, allows the full gain from purchase to sale to be reduced by the period of ownership until the rule change as a proportion of the full time of ownership. If there is a loss upon disposal, the full reduction in value can be used or carried forward as a loss, without the need for apportionment.
As it is the taxpayer’s responsibility to accurately value the property, it is in their interest to consider acquiring one or more professional valuations close to the rule change.
The rate of CGT
The rate of CGT is the same as for a UK resident individual, currently 18% and 28%(which includes the 8% residential property surcharge).. Which rate applies depends upon the size of the gain and the individual’s other UK income and chargeable capital gains in the year of disposal.
The annual CGT exemption is also available, currently £11,100, or two exemptions if the property is jointly owned.
Payment of NRCGT
A NRCGT reporting form now exists. The CGT is payable in the normal way for a taxpayer already within the self-assessment system. For those who are not, tax is payable within 30 days following conveyance.
Private Residence Relief
This remains available to the extent that the property is the owner’s only or main residence. However, from 6 April 2015 this can only be claimed where a new occupancy test is met, and on a year-by-year basis. The test is met if the taxpayer or spouse/civil partner stay in the property for at least 90 nights during the tax year in question.
Several other Private Residence Relief (PRR) ‘subsidiary reliefs’ remain. Where the property in question was once the taxpayer’s main residence, ‘final year relief’ allows a further proportionate reduction in the gain. This is currently set at 18 months (36 months prior to 5 April 2013).
Where the same property was let out, ‘lettings relief’ reducing the remaining gain further is available up to a maximum of £40,000.
Finally, there may be qualifying periods of absence (‘absence relief’) where the owner was overseas in work related accommodation at the requirement of their employer, and no other properties were owned.
There’s more to consider than Just New NRCGT When It Comes to Tax
IHT shouldn’t be forgotten. There is a common misconception that only the estates of UK domiciles are subject to UK IHT. This is not the case, and any UK property will create a taxable estate for a non-domicile, whether resident or not. The liability upon death being 40% above a nil rate band of £325,000.
Also, rental income is subject to income tax in the UK. Whilst the £10,600 personal allowance might partly offset this, consultation initiated in 2014 concluded that it would be desirable for this advantageous feature to be removed for most non-residents from 2017. Further consultation is expected.
Property Related Investment Risk
Investing directly in residential property may feel to clients like a low risk option, especially as they get a physical asset to show for their money, but if property prices decline, and they don’t hold an uncorrelated asset, they could potentially lose a considerable amount of money. Property is generally illiquid, so selling quickly normally means accepting a lower price.
It should be remembered that although the UK has seen good property growth since 2009, between 2008 and 2009 the average UK property price dropped by close to 25%, and that
Mark Carney, the Governor of the Bank of England, reflected upon a housing ‘bubble’ in London and the South East.
With interest rates also being at a historical low, any increase may substantially weaken demand, with distressed sales having the ability to negatively disturb the market.
And topically, given the political climate, the threat of a ‘mansion tax’ might not be good for property prospects.
Nobody knows what the prospects are for UK residential property in 2015 and beyond, but as the graph below shows, prices have been subject to considerable fluctuations in the last 10 years.