In the Autumn Statement, George Osborne announced a new capital gains tax (CGT) charge. From April 2015, CGT will apply on gains arising on disposals of residential property held by non-resident companies, trust and individuals. UK companies currently pay corporation tax on capital gains (at up to 21% for the year ended 31 March 2015 and 20% thereafter). HMRC and the Treasury have now issued the consultation document on the proposed legislation.
The proposal is for non-resident individuals to be charged tax at a rate of 18% or 28% on the gains that they make, depending on their total UK income and gains. Non-resident individuals will also be able to take advantage of the annual exemption resulting in the first £11,000 of gains to be tax exempt.
The Government has yet to confirm the rate of tax which will apply to disposals of UK residential property by non-resident companies. UK companies currently pay CGT at the current corporation tax rate (20% for the year ended 31 March 2015).
Companies caught under the Annual Tax on Enveloped Dwellings (ATED) CGT charge will not be additionally liable to pay CGT under these rules. Those companies are still subject to the ATED-related CGT charge of 28%.
The new changes will also apply to residential properties that are let out. This means that even if those properties were exempt from ATED they will now be caught by the new CGT rules for residential properties. This is a significant change from the current position where non-resident landlord companies have been exempt from capital gains tax. There are no current proposals to apply the rules to commercial property.
Some limited exclusions are proposed and include the following:
- Accommodation for children and students such as students’ halls of residence
- Accommodation to provide care
- Other communal accommodation, such as communal residential accommodation for members of the armed forces
- Pension funds
- Companies liable to pay ATED-related CGT (as mentioned above)
- Foreign REITs where they are equivalent to UK REITs; and
- Non-residents investing in UK residential property through UK REITs
Properties held by UK resident companies, trusts and individuals will not be included in the new rules as they are already taxable under the current CGT regime for resident taxpayers.
Principal Private Residence (PPR) Relief
PPR relief will be available to non-resident individuals and trusts in certain circumstances. However, to prevent non-residents making the election to treat their UK property as their main residence, and thus being given relief from CGT, the Government is considering changing the election rules for both residents and non-residents. The Government may:
- Remove the ability for a person to elect which residence is their main residence for PRR. This would mean that PRR would be limited to that property which is demonstrably the person’s main residence; or
- Replace the ability to elect with a fixed rule that identifies a person’s main residence e.g. that in which the person has been present the most for any given tax year. This would be a significant change to the way in which PPR currently works in that at present, a taxpayer who owns more than two properties can elect which property is to be treated as the main residence.
If you would like to discuss how these new changes may affect you, please speak to your contact partner or to our tax partners Clare Munro or Phil Moss who will be able to advise you.