Tag Archives: non-residents

CGT for Non-Residents – to Value or not to Value

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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:-

  1. 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.
  2. 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.
  3. 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.

 

CGT rates have changed since this article was written and more up to date information can be found in our 2024 Spring Budget response.

Capital Gains Tax on Non-Residents – update

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HM Revenue & Customs have issued their revised proposals following responses to the consultation on implementing a Capital Gains Tax charge on non-residents owning residential property in the UK.  The key points arising are as follows:-

The new charge

  1. The government has confirmed that a Capital Gains Tax charge on non-residents owning UK residential property will be introduced with effect from April 2015. It will however be restricted to gains arising from April 2015 only.
  2. Two methods will be allowed for calculating the proportion of gain arising from April 2015 for properties already owned prior to that date. The methods are:
    1. rebasing to market value April 2015 or
    2. time apportionment over the whole period of ownership.

Principal Private Residence (PPR) election

  1. One area of the original consultation which was seen to be controversial was the proposal to remove the option to elect for which of more than one property was the individuals PPR. This was seen as controversial partly because the proposal was to remove the right to elect from everyone and not just non-residents. The new proposals retain the election in place but introduce a new restriction. It will no longer be possible for an individual to elect for a property to be their main residence unless
    1. Either the person making the disposal was resident in the same country as the property for that tax year, or
    2. The person spent at least 90 nights in that property (or across all the persons properties where they have multiple properties in a country in which they are not tax resident) in that year – this is referred to as “the 90 day rule”.

The 90 day rule will apply to existing PPR elections as well as new ones. A property where the election has been made but which doesn’t meet the 90day rule in any year will not qualify as the PPR for that tax year.

Companies

  1. The government has confirmed that non-resident companies will be brought within the scope of this charge. The rate of tax applying will be the standard Corporation Tax rate of 20%. There is an exclusion for widely controlled companies and the introduction of a new narrowly controlled company test.
  2. The existing Capital Gains Tax (CGT) charge related to the annual tax on enveloped dwellings (ATED) will remain in place and will take precedence over the new charge. To the extent that properties fall within the ATED related CGT charge regime, tax will be charged at 28%. Properties not falling within that regime will instead be taxed at the Corporation Tax rate of 20%.

Reporting and paying

  1. Reporting and Paying – any person currently within the self-assessment regime will be able to report any such disposal through their existing self-assessment returns. Anyone else outside of the self-assessment regime will need to report separately within 30 days of the property being conveyed.

For full details please see HMRC website.

Capital gains tax to apply to non-residents from April 2015

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HM Revenue and Customs have issued a consultation document introducing the capital gains tax charge on non residents owning residential property in the UK which was proposed in the Autumn Statement.

Currently non-residents are not subject to capital gains tax. From April 2015 a new charge will apply to non-residents on gains arising on UK residential property after that date.

Tax will be charged at the same capital gains tax rates as for UK individuals of 18% or 28% depending on their level of income. Principal private residence relief will be available in limited circumstances, but as part of the proposals HMRC are considering removing the option to make a main residence election, not just for non-residents, but for all individuals.

The charge will apply to capital gains regardless of whether the property is rented out. This is different from the current Annual Tax on Enveloped Dwellings (ATED) charge which applies mainly to companies who own UK residential property, where relief from the charge is available for let properties.

The charge will not apply to UK residential properties held through a UK REIT or other collective investments scheme. This will be subject to a genuine diversity of ownership test to avoid small groups buying property jointly to avoid the charge.

To ensure compliance it is proposed that solicitors, accountants or other agents dealing with relevant sales will be required to withhold tax from the sales proceeds.

This is a major change for all non-residents owning UK residential property. Everyone falling into this category should be reviewing their tax position in advance of next April.