UK government finalises new capital gains tax charge for non-resident homeowners

The new regime is intended to address the "significant unfairness" within the existing regime under which UK residents are charged CGT on the sale of a residential property that is not their main home but non-residents are not, said financial secretary David Gauke in the government's response to its consultation on the plans. He said that the change, which is due to take effect in April 2015, would bring the UK into line with "many other countries around the world that charge CGT on the basis of where a property is located".

"Many will consider that what is proposed puts seeming fairness ahead of practical application of tax rules and will add greater complexity to the Tax Code whilst not materially increasing tax yield," said tax expert Ray McCann of Pinsent Masons, the law firm behind Out-Law.com. "All in all there is a distinct feel of change for change's sake in what is proposed."

"Of particular concern is the inevitable need to introduce new reporting and payment requirements although the full details of the new procedures are still to be provided. These changes will make the taxation of UK real property even more complex than it is at present with a patchwork of different rules applying for CGT, SDLT, income tax and ATED, all of which will be potentially payable by taxpayers who are unfamiliar with UK tax rules and so likely to incur greater costs of compliance or fail to comply with the rules in many cases through ignorance," he said.

The UK government announced its intention to include gains made by non-UK residents disposing of UK residential properties within the scope of CGT as part of the 2013 Autumn Statement. UK resident individuals are currently subject to CGT on gains made on residential property provided that the property is not their principal private residence (PPR) or, if they own more than one property, the one nominated as their main residence. CGT is payable at 18% for basic rate taxpayers and 28% for higher rate taxpayers.

In April 2013, the government introduced a CGT charge on residential properties held through companies.  Under the charge, CGT is payable at 28% in respect of gains accruing on the disposal of interests in high value residential property that is subject to the annual tax on enveloped dwellings (ATED). ATED was also introduced in April 2013, and is currently payable in respect of high-value residential properties held by companies and other non-natural persons. Dwellings purchased as part of a genuine property rental business, held for charitable purposes or run as a commercial business are exempt from the ATED.

None of these exemptions will apply to the new CGT charge, which will affect disposals of UK residential property by a non-resident individual or trustee, personal representatives of a non-resident deceased person and some non-resident companies. It will generally not apply to "communal residential property", such as boarding schools and nursing homes. Originally, the government had proposed including residential accommodation for students within the charge, unless it was part of a hall of residence. However, following responses received during the consultation, the government has decided to exclude all purpose built student accommodation. 

CGT for non-UK residents will be charged in line with existing UK CGT rates and the annual exempt amount will also be available for individuals. Those taxpayers with an "existing relationship" with HMRC will be able to pay the charge as part of their existing self-assessment process. The tax will only apply to gains made above market values from 5 April 2015, when the new charge comes into force.

One significant change that the government has made to the proposed regime since the initial proposal was published is designed to ensure that "diversely held institutional investors" are not subject to the charge. A "narrowly controlled company test", alongside a genuine diversity of ownership test, will ensure that disposals made by non-resident individuals and "closely connected parties" will be subject to CGT but that most disposals made by institutional investors will not be.

"The exemption from the charge for fund investors is welcome and is in line with statements made by the government earlier in the year," said tax expert John Christian of Pinsent Masons. "However, although the intention of the fund exemption is to bring only family investment vehicles into the charge, there look to be situations where certain corporate joint ventures could also be caught by the charge."

The government had also suggested abolishing the ability of UK residents with an additional home outside the UK to elect for their UK property to be treated as their PPR for the purposes of the CGT exemption. Following the consultation, the government is now proposing that both UK resident and non-UK resident taxpayers will be prevented from designating a UK property as a PPR "unless they have resided in the property for at least 90 midnights in the property in that year". Access to PPR will also be available for trusts if the beneficiary is non-UK resident on the same basis.