UK Non-Residents: Capital Gains Tax and Main Resident Exemption


The UK Government has long stated that, on the disposal of UK residential property, UK Capital Gains Tax (CGT) should be paid by both residents and non-residents alike. It has now taken a further step toward to bring to an end the current system that it considers to be unfair by allowing non-resident to escape from the UK’s CGT net.

Proposals were announced in 2013 and a consultation process started which has now ended, with the Government publishing its final proposals as they are likely to appear in the draft of the Finance Act 2015, due later this month.

Though the changes will principally affect non-residents there will also be an impact on residents as a result of changes to the exemption from CGT of the principal residence.

The CGT charge will affect property that is defined as a ‘property suitable for use as a dwelling’, which includes property under construction and a dwelling’s associated gardens or grounds.

The CGT charge will affect UK non-resident individuals, trustees and some non-resident companies, ‘narrowly controlled companies’. Narrowly controlled companies are defined non-resident companies controlled by five or fewer individuals. Non-resident partnerships will also be caught, with a proportionate CGT charge on each partner.

There are a few exemptions including institutional investors and funds which reflect the Government’s wish to encourage institutional investment in UK residential property.

For non-resident companies the rate of tax will be 20% if the company is not already within the ATED, the Annual Tax on Enveloped Dwellings, CGT regime. CGT at 20% corresponds with the UK corporate tax rate.

Non-resident individuals will be charged at 18% or 28%, depending on the individual’s total annual income and gains in the UK, subject to an £11,000* annual exemption for taxable gains. This is the same tax rate and exemption enjoyed by UK residents. Non-resident trustees will also be treated in the same manner as resident trustees and subject to a 28% CGT charge and an annual exemption of £5,500.

It should be remembered that non-resident companies subject to ATED will be subject to the ATED CGT charge at the rate of 28% on the disposal of residential property. On occasions when both ATED CGT and CGT charges apply, the higher ATED CGT charge will take precedence over CGT.

CGT will be calculated on gains accruing after 6 April 2015; gains before this date will not be taxed. On the disposal of the property the taxpayer can elect either to calculate the gain by apportionment over the entire period of ownership or take as the base value as at 6 April 2015. If the gain is subject to ATED CGT time apportionment is not permitted. It will be possible to offset gain and losses and for losses to be carried forward.

We would suggest that it may be appropriate to obtain a valuation at 6 April 2015, for possible use on a later sale to be in a position to take an informed decision as to the most advantageous option.

The disposal of the property must be reported to HMRC in 30 days of completion and the tax paid within the time limits. The process of collection has yet to be confirmed but a system of withholding  tax is unlikely to be imposed.

Changes to Main Residence Exemption
Changes have been made to the existing rules under which individuals can nominate a UK dwelling as their main residence and thus claim relief from CGT. It is intended to introduce a ‘90 day rule’ for UK non-residents. Its effect is to require non-residents to spend at least 90 midnights at the property in any tax year (6 April to 5 April) to qualify for the relief. Individuals who are UK tax resident will continue to be able to claim the relief for UK residential property. The nomination must be made at the time of the disposal of the property.

In cases where the residential property is held by a trust, if the beneficiary is non-resident, providing he meets the 90 day rule, the main residence exemption may apply.

Furthermore, it is important to note that UK resident individuals, who own non-UK residential property, will have to respect the 90 day rule, should they wish to claim the main residence exemption for capital gains realised on the disposal of the property overseas.

Occupation for these purposes includes occupation by the individual’s spouse or civil partner which will be considered as occupation by the individual, which we consider to be a generous concession.

The Government states that it is not intended to broaden the scope of the CGT charge to non-residential, commercial property, but time will tell if that view changes.

*Approximately €13,800 / USD17,250