Capital Gains Tax for Non-UK Residents

As the government first announced in the 2013 Autumn Statement and subsequently enacted in the Finance Act 2015, capital gains tax (CGT) applies to non-residents disposing of UK residential property, the tax is levied on gains arising on disposals after 5th April 2015 and only applies to gains made since that date.  Before then, CGT did not apply to non-residents, other than those carrying on a trade in the UK, certain temporary non-residents or companies subject to the 'annual tax on enveloped dwellings' (ATED) charge.

The extension of the CGT charge goes some way to putting the UK system in line with other jurisdictions that charge tax on the basis of where the property is located rather than where the owner is resident.

  • The CGT charge applies to gains realized by non-resident individuals who hold UK residential property directly or via a partnership, non-UK resident trusts and non-resident companies, with certain exceptions.
  • The charge applies to gains realized on disposal of UK residential property and property that has the potential to be used as a residence. This includes property which is currently being built or adapted to be used for residential purposes, and this is of particular relevance to off plan purchases.
  • Residential property which is used on a communal basis, like hotels, care homes, school boarding houses, military accommodation, hospitals, hospices, prisons and purpose-built student accommodation including at least 15 bedrooms (if occupied by students on at least 165 days in the tax year) is exempt from the new CGT charge.
  • The charge will not apply, on a claim, to a 'diversely-held' company or a widely-marketed OEIC or unit trust. A 'diversely-held' company is one that is not 'closely held'; one broadly like a close company.
  • Pension funds established for 'a diverse range of individuals' are excluded from the charge.
  • Charities will also be excluded.

For residential property held on 6 April 2015 and disposed of on or after that date, the 'default' position will be for the gain on disposal to be on the excess over the market value at 5 April 2015.   It is therefore recommended that valuations are carried out as soon as possible, as a valuation carried out at or near to the date is much more difficult for HMRC to challenge than one carried out years later when a property is sold.

Alternatively, an individual may elect to apportion the gain calculated by reference to the actual proceeds over actual original cost, and be taxed on the proportion of ownership after 5 April 2015 compared with the total period of ownership.

It is important to note that the charge will also apply to rental properties as well as those 'owner-occupied'.  This is in contrast to the ATED-related CGT charge, where residential rental property held as part of a genuine business is exempt.

The relationship to ATED CGT is as follows: -

  • Companies realizing gains which are also ATED-related gains, currently subject to tax at 28%, will be excluded from the new charge.
  • Otherwise, non-resident companies will be subject to CGT at 20%, on the gains affected, net of an adjustment for inflation.  This is in line with UK companies.

For individuals, the CGT charge will be at 18% for basic rate taxpayers and at 28% for higher and additional rate taxpayers. The applicable rate will be determined by reference to the non-UK resident individual’s UK income levels for the relevant tax year. They will be entitled to the CGT annual exemption.

For non-resident trusts the CGT charge will be at 28%, and they too will be entitled to an annual exemption, at half the rate for individuals. This is shared between trusts with the same settlor.

As regards losses, any allowable losses on UK residential property realized by non-residents will be ring-fenced, and only set against gains realized on disposal of UK residential property, either in the same year or carried forward to later years. Unused allowable losses on UK residential property realized by UK residents who become non-residents may be set against gains on UK residential property subsequently realized when non-resident. When a non-resident becomes a UK resident unused losses on UK residential property realized while non-resident are to be available to be set against general chargeable gains, however.

The gain has to reported and any tax paid within 30 days of the disposal being made, the relevant date being the date of completion.  There is an exception to this when the individual is subject to the Self Assessment regime and has to submit a self assessment each year.  In this case the gain is still reported within 30 days but the tax is paid along with the self-assessment return as normal on the 31st January following the tax year in which the disposal takes place, therefore a significant cash flow advantage could be achieved by ensuring a self assessment return is issued for the year in question.

Main residence election

Before 6 April 2015 someone with two or more residences might elect which one would attract CGT exemption on disposal. Thus, if the law were not changed, a non-resident with homes in both the UK and overseas could have expected to avoid the new CGT charge simply by electing for his UK home to enjoy the exemption. The Government was initially considering simply withdrawing that election; and only the home which was really the main residence would be exempt. Instead, however, from 6 April 2015, someone not resident in the UK may only claim a dwelling in the UK to be his main residence in a particular tax year if he spends at least 90 days in that year in one or more dwelling houses in the UK in that year. Similarly, a UK resident is to be only able to claim the main residence exemption on disposal of a residence overseas if he spends at least 90 days in a tax year in one or more dwelling houses in the overseas territory in that year.

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