Following the introduction of a CGT charge on those “non-natural persons” (typically companies) subject to the ATED regime in 2013, this year’s Finance Bill is set to widen the CGT charge on disposals of UK residential property further to include non-UK resident individuals, partnerships and trusts.
From 6 April 2013, rules have been gradually introduced which extend the scope of capital gains tax (CGT) to include non-UK resident taxpayers disposing of UK residential property. Initially only companies and certain other vehicles were subject to this tax and only with respect to gains on higher value UK residential properties, typically used by someone connected with them as their home.
Plans to extend the scope of the CGT charge to cover disposals of UK residential property by non-UK resident individuals and other classes (e.g. trusts) of non-UK residents regardless of value or usage were announced in the 2013 Autumn Statement, and the Government confirmed last year it would introduce changes from April 2015 on gains accruing from this date. There will continue to be no change to the taxation of non-UK residents owning UK commercial property, or holding UK property as trading stock.
At its heart, this latest change is aimed at bringing the tax treatment of non-UK resident individuals in line with UK resident individuals, whether these individuals are investing directly or through another vehicle. There are specific exemptions from the charge intended to ensure that barriers to genuine institutional investment are not created. Specific classes of qualifying institutional investors will be exempt provided they meet ‘genuine diversity of ownership’ tests, and all other non-UK resident companies and funds will be subject to a ‘narrowly controlled’ test (similar to existing close company tests) to determine whether they can potentially fall outside the scope of the tax charge.
The ATED/high value property and CGT rules were introduced from 6 April 2013 to combat perceived tax avoidance involving the use of ‘non-natural persons’ (typically companies) to hold UK properties. These rules will remain in force (although this will cause considerable complexity in the tax rules) and could in principle apply to a UK property disposal in addition to the new extended charge. Any gain that is potentially subject to both charges will be liable to the existing ATED/high value property and CGT rules in priority. If a gain is not fully chargeable to the existing rules in this way, any balance of the gain will be charged under the new rules. Importantly, whereas there are a number of exemptions from the ATED based CGT charge to carve out commercially let or development property, these exemptions will not be applicable to the new CGT charge. Overseas landlords are therefore potentially in scope.
The new restriction on PPR
The extension of CGT has been accompanied by amendments to the Principal Private Residence Relief (PPR).
Without any change to the current PPR rules, a non-UK resident with a UK residential property, could nominate it as their main residence to obtain PPR, and thereby avoid the extended CGT charge. HMRC believs this would undermine the extension of the CGT rules.
From 6 April 2015, therefore, any residence owned by a UK or non-UK resident will only be capable of qualifying for PPR if it is located in a territory in which the individual is resident or, where it is located in a different territory, the individual meets the ‘day count test’ in relation to the residence. In determining the individual’s residence, the Statutory Residence Test will apply in the UK. For other territories an individual will, broadly, be treated as resident if they are liable to tax in that territory by virtue of their residence or domicile. The day count test will be met if the individual or their spouse/civil partner spend at least 90 midnights in the property, or in other properties in the same territory, in the tax year.
In practice, under the new rules, UK tax residents will typically continue to obtain PPR for their UK homes as with the current rules. Individuals who retire abroad but keep their homes in the UK, will be treated as entitled to PPR for the years they were in the UK, but will be subject to the 90-day rule thereafter for each tax year from 2015/16 onwards (apart from the last 18 months of ownership). The same will apply to international assignees who become non-UK resident but keep their UK property, which was their main residence before departure.
A UK tax resident with an overseas second home must, from 6 April 2015, satisfy the new 90 day rule (unless they are also resident in the relevant territory), even if they have already elected for the second home overseas to be their main residence for PPR.
From April 2015, therefore, individuals may have to seek overseas advice to determine whether or not they are ‘resident’ in a territory in which they have a dwelling, in order to determine whether they need to meet the day count test before being able to make an election for the property to be their main residence for PPR.
What might we see in the Budget?
As with the Diverted Profits Tax, the Government’s direction of travel here is clear and we are unlikely to see any changes to the principles underlying the legislation. The draft legislation published on 10 December 2014 was, however, work in progress therefore, we will see some corrections of drafting errors and further legislation to cover, for example, the procedures for reporting gains and the payment of the tax charge. We are also expecting further legislation on the interaction of this new charge with the current temporary non-residence rules.