From 6 April 2019 the UK capital gains tax (CGT) regime was extended to cover the disposal of non-residential property by non-UK residents. This change to the tax rules levelled the playing field between (i) UK residents and non-residents, and (ii) residential and non-residential property. This article reviews the impact of this potential CGT charge and reporting requirement for non-UK residents.
What was the position before 6 April 2019?
The UK CGT rules were initially extended to cover capital gains arising on the disposal of UK residential property by certain non-UK residents with effect from 6 April 2015. No UK CGT was previously payable by individuals who were non-UK residents on the sale of UK property.
The April 2015 change to the CGT rules was designed to assist in making the UK tax system fairer and address the imbalance between the tax treatment of UK residents and non-UK residents. Non-UK resident individuals, trustees, executors, close companies and certain forms of unit trusts and OEICS owning UK residential property were all caught by this change to the CGT rules.
From 6 April 2013, however, companies (both UK resident and non-UK resident) holding high value residential property could have potentially been caught by the Annual Tax on Enveloped Dwellings (‘ATED’) CGT charge on the disposal of high value residential property. The ATED tax regime originally only potentially applied to residential properties with a value in excess of £2 million. This threshold was initially lowered to £1 million with effect from 1 April 2015 before subsequently being further reduced to £0.5 million from 1 April 2016. This 28% CGT charge for capital gains arising on the disposal of residential properties caught by these tax rules was abolished for disposal taking place on or after 6 April 2019.
What new rules came into force from 6 April 2019?
The scope of UK CGT was extended to cover capital gains arising on the disposal of all non-residential property by non-UK residents from the start of the 2019/20 tax year. This covers chargeable gains triggered by non-UK residents on:
- the disposal of interests in UK land and property; and
- the indirect disposal of assets where:
- at least 75% of the asset’s value is derived from UK land(a ‘property rich entity’ (PRE)); and
- the person disposing of the asset has a substantial indirect interest in the UK land (generally 25% or more of the voting power, proceeds on the company being wound-up or income entitlement)
All non-UK residents (excluding exempt investors, for example, overseas pension schemes and sovereign wealth funds) are caught by this regime with any capital gains being subject to UK CGT or corporation tax (where the disposal is by a non-UK resident company).
The application of this regime to Collective Investment Vehicles is beyond the scope of this article.
How is the capital gain calculated?
The calculation of the net chargeable gain potentially subject to CGT or corporation tax will depend upon whether it is triggered on the disposal of a residential or non-residential property.
The acquisition cost for tax purposes will be rebased to its market value at April 2015. Only the proportion of any capital gains attributable to the period after 5 April 2015 will be potentially subject to tax.
It is, however, possible for the non-UK resident to make an election for the original acquisition cost to be used with either (i) a retrospective basis of calculation under normal CGT rules or (ii) a straight line apportionment of the gain being applied.
This may help reduce the non-UK resident’s tax exposure.
The acquisition cost for tax purposes will automatically be rebased to its market value at April 2019.
It is again possible for the non-UK resident to make an election for the original acquisition cost to be used in the calculation if this gives a better result.
What rate of tax is applied?
The rate of CGT applied to any net chargeable gains arising under the new regime will depend upon:
1. Is it a disposal of residential property or non-residential property?
- A building used or suitable for use as a dwelling
- Properties in the process of being constructed or adapted for use as a dwelling
- The garden or grounds of such a building, including structures on the garden or grounds
- The right to acquire a UK dwelling ‘off-plan'
- Commercial property, for example, shops or offices
- Agricultural land
- Any other land or property which is not used as a residence
It may be appropriate in certain circumstances to apportion the chargeable gain over time periods where the land or property was in residential and non-residential use.
2. Is the non-UK resident a basic rate or higher rate income taxpayer?
The income tax status of the non-UK resident will depend upon the level of their UK source income in the tax year of disposal.
Basic rate taxpayers will be subject to CGT at the following rates on any chargeable gains falling within their available basic rate tax band (2021/22 – taxable income up to £50,270):
- Residential – 18%
- Non-residential – 10%
Higher rate taxpayers will be subject to CGT at the following rates on any chargeable gains falling within their higher rate or additional rate band:
- Residential – 28%
- Non-residential – 20%
For accounting periods commencing on or after 6 April 2019, non-UK resident companies will nowbe subject to UK corporation tax on their net chargeable gains arising on the disposal of UK property and property. The rate of corporation tax for 2021/22 is 19% but this will rise to 25% from April 2023.
There are a number of potential reliefs and exemptions available to non-UK residents, including:
- CGT annual exemption (2021/22 - £12,300)
- Transfers between spouses or civil partners on a no gain/no loss basis
- Principal private residence relief
- Intra-group transfers on a no gain/no loss basis
- Substantial shareholding exemption
- Trading exemption (trading purposes e.g. retail and hotel chains)
- Low value non-trading interests (where less than 10% of overall value of UK land used for trading purposes
- Exemptions under double tax treaties
What are the deadlines for reporting and paying any tax?
Non-UK residents making a disposal of UK property must within 30 days from completion of the disposal both:
- Complete and file a non-resident CGT return; and
- pay the CGT liability
Any non-resident disposals subject to corporation tax will require to be reported and any corporation tax settled within normal UK corporation tax filing and payment deadlines.
A non-resident CGT return will require to be filed within the 30 day window even where there is no tax liability and/or the non-UK resident submit an annual self-assessment tax return.
It should be noted that the responsibility lies with the non-UK resident. There is no third party reporting obligation on advisers.
We’re here to help
It is always important to consider the UK tax implications on the acquisition, ownership and disposal of any interest in property situated in the UK. Simple and effective advice given at the earliest opportunity can help ensure non-UK residents meet their UK reporting obligations and minimise their tax exposure.
Anderson Strathern has an experienced team of tax and property specialists who are able to provide you with practical, commercial and tax-effective solutions to help safely guide you through this ever changing landscape.