Capital Gains Tax United Kingdom

Will Changes to Capital Gains Tax Hit Only Non-UK Residents?

British expats and foreigners who own residential property in the UK will have to pay capital gains tax from 2015. The idea, first muted in 2013,  was published as a consultation paper in March 2014, entitled “Capital Gains Tax Charge on Non Residents”, in readiness for implementing the change in 2015. There will be implications for anyone who owns property in the UK but does not reside here, but there may also be implications for anyone who owns property but does live here.

The key points about the changes are as follows:

• CGT will apply to non-UK residents who sell residential property in the UK;
• This will apply from April 2015 onwards;
• The rate of CGT for individuals will be established in a similar way to UK residents: charged at either 18% or 28%;
• The charge will apply to most residential property, with no minimum threshold on value and regardless whether or not the property is buy-to-let;
• Although the CGT rate for non-resident "non-naturals" has not yet been announced, most "non-natural" non-residents will be subject to the charge, although there are exceptions, such as pension funds;
• Non-resident individuals will benefit from the annual CGT exemption;
• Principle residence relief will be available to non-residents, but it is envisaged that this may bring about a change to the current system of being able to elect one’s main residence, and thus the changes will impact everyone selling UK property.

Main Issues

Why charge CGT on foreign property owners?

Government were most anxious to encourage foreign investment in property but wanted to halt an all out sell-off at the same time, which would raise property prices still further, especially in London. 

CGT relief

One of the most important issues is the changes to CGT relief. Concerned that if main residence relief is made available on the sale of a non-resident’s home—in that the non resident could simply elect their UK home as the main residence rather than the non-UK property where no CGT is payable and therefore effectively avoid paying UK CGT—the solution may be to remove the ability to elect which of their homes should be regarded as their main residence for CGT purposes, regardless, for all second home owners. Instead, the relief would only be available on the property which, as a matter of fact, is the main residence, or on the property that qualifies as such in accordance with a proposed new fixed rule. This is a fundamental change to widely used CGT relief.

Timing: cut off and start off points for imposing the tax

Imposing CGT on British expats and foreigners who own residential property in the UK will bring the UK in line with most other countries. Importantly, however, the tax will only apply to gains made after April 2015, so those who have benefited from recent price growth will be spared.

Base cost

There was speculation as to whether non-residents "base cost" for CGT would be uplifted to the value as at April 2015. On the basis that it would be unfair to retrospectively tax foreign owners of UK property, it is not thought that this will be the case, so if, say, you bought a property for £300,000 in 1989 and the property is worth £2M in 2015 and you sell in 2016 for £2.5M, you would pay capital gains tax on £500,000 not £2.2M. All this seems fair and reasonable for someone who has never lived in the UK and is a "true" foreign investor. It is not so straightforward for UK residents moving abroad.

Buy to let landlords

UK residents considering long-term retirement abroad funded partly by buy-to-let income with the possibility of selling up later in retirement, are likely to see around 28% of their profit slashed on sale of any UK property. The change in CGT on sales after 5th April 2015 will particularly adversely affect those who have buy-to-let investments in the UK, are no longer resident, but who have tax records here. This is because HMRC already have them registered as a non-resident landlords for income tax on their rental income. Most will own UK buy-to-lets in their own names, which makes taxing them easier.

Whithholding tax mechanism

A "withholding tax mechanism" is planned for the charge so that tax can be collected at source from the proceeds of a sale by a non-resident. This may involve solicitors or accountants and potentially more costs for property owners.

What should you do?

We would always advise consulting with your account manager before making any decision about buying and selling property anyway, but if you are thinking of leaving the UK, or have already left the UK, we advise that you contact us immediately to discuss the issues further.

About the author

Sumit Agarwal
Sumit Agarwal (ACMA ACA India), the Managing partner of dns accountants is a highly respected accountant with expertise in helping owner-managed businesses.