For as long as I have been working in the tax profession, arguably the two best pieces of basic CGT planning have been death and becoming non-resident. I remember in my formative years as a Tax Adviser being somewhat shocked and, admittedly, envious of a client who had emigrated to Australia. In the following tax year they managed to sell a number of properties free of capital gains tax. The simple reason – they became non-resident in the previous tax year and would remain outside the UK for at least five tax years.
From 6 April 2015 the purge on non-residents continues with offshore based individuals owning UK residential property now having to fall in line with those who have not been able to negate their gains by emigrating to some exotic destination. Simply put, non-residents will pay capital gains tax on sales of UK residential property.
Unlike the recently introduced Annual Tax on Enveloped Dwellings, there are no valuation bands determining the charge to be paid and aside from main residence relief, there is no relief available from the charge. The rate of tax for non-resident individuals will be the same as for their UK counterparts, being 18% if the gain falls within the basic rate of tax and 28% if any part lands in the higher rate.
Fortunately, the new rules are not retroactive so the news that a non-resident can re-base the value of their property as at 5 April 2015 has been welcomed. This may sound fairly straightforward but perhaps the biggest dilemma facing overseas UK residential property owners will be the question – ‘should I re-base’ and then having decided to do so, ‘should I obtain a valuation’.
There will be three options available to a non-resident for a future sale of their UK residential property:-
- The default position is that the individual’s property is revalued as at 5 April 2015 and only the increase in value from 5 April to the date of sale is charged to capital gains tax on sale. This is the basic default position and it will involve revaluing the property. A disposal could be many years into the future when the value at 5 April 2015 has been long forgotten.
- An election is made so that the whole gain from purchase is calculated, as you would normally do with a UK resident, but once that gain is established, it is then apportioned on a days basis between pre and post 5 April 2015 periods, with only the post April 2015 pro-rated gain being charged to capital gains tax. No valuation would be required here.
- The taxpayer elects to tax the gain for the whole period of ownership with no re-basing and no splitting the gain pre and post 5 April 2015. Clearly, this would only be worthwhile if there is a loss accruing. Again, no revaluation would be required here.
The easiest options in terms of administrative burden and cost are options 2 and 3 above but what if the non-resident taxpayer does not opt out of the default position in option 1?
Perhaps one of the most common enquiries raised by HMRC on the sale of land and buildings is where the value of a property entered within a Tax Return is disputed. This can happen even where there has been a professional valuation undertaken. These enquiries usually involve the District Valuation expert entering into negotiations with the professional Valuer employed by the taxpayer. Under these circumstances the client and Tax Adviser are able to sit back and wait for the negotiations to be concluded.
But what happens where a formal valuation has not been undertaken?
The Revenue make it clear in their responses to ‘frequently asked questions’ published on 18 March 2015 that it is the ‘taxpayer’s responsibility to accurately value the property’. Although the Revenue state that they do not necessarily expect the taxpayer to make the valuation on or around the 5 April 2015 re-basing date, they advocate making notes as to the general condition of the property for future reference. We would go further and suggest that photographs are kept of the site and a record kept of the published sales prices of similar properties in the area.
One option alluded to by HMRC in the guidance is their post transaction valuation review process, which enables taxpayers to agree a value with the Revenue after a disposal has taken place but before a Return disclosing the transaction is submitted. This could be an attractive proposition for those non-residents already within the Self-Assessment regime. If a property is sold on, say, 1 May 2015, the Return declaring that disposal is not due to be filed until 31 January 2017 so a post-valuation request could realistically be made. It should be noted that the ICAEW (the regulatory body governing accountancy practices) have recently reported significant delays in processing these requests so it may be sensible to factor in sufficient time for the process to conclude.
However, if a non-resident is not within Self-Assessment, the current proposal is that they should submit a Non-Resident CGT Return within 30 days of the completion date. If my mathematics is correct, a post transaction valuation request would not work here because HMRC clearly state within the notes accompany the valuation request form (CG34) that it must reach them at least two months before the filing date. This is slightly worrying!
Consequently, the non-resident property owner who is not within Self-Assessment could face some serious problems later on down the line when they come to sell. Without a professional valuation and no detailed knowledge of the UK property market, a non-resident could be in the unenviable position of having an enquiry that extends for several years with significant professional costs and an unexpected tax bill.
It is not unusual for an enquiry on valuation matters to rumble on for several years and the outcome is not always favourable. Our recommendation is that a contemporaneous valuation is obtained from a professional valuer. The cost of a professional valuation now may well be a small price to pay for greater certainty in the future.
If you are affected by the new rules and would like advice, please contact one of the tax team who will only be too happy to assist. We can also introduce you to a professional valuation expert if required.