UK residential property - new capital gains tax rules

Background

The UK residential property market has been particularly attractive to foreign (non-UK resident) investors for many years as they have been able to benefit from not having to pay capital gains tax ('CGT') on gains realised on selling the property.  However, perhaps unsurprisingly, the UK government has said foreign owners and UK resident owners ought to be treated in the same way.  As a result, in 2013 government announced that the CGT regime would be extended to include gains realised from the sale of residential property owned by foreign owners.  These changes came into force on 6 April 2015.

Scope of the rules

Since April 2013, CGT has imposed on the sale of residential property by non-UK resident companies which fell within the Annual Tax on Enveloped Dwellings ('ATED'). 

However, since 6 April 2015, all owners of UK residential property will be subject to CGT, although there are some limited reliefs available (set out below).  Only gains from April 2015 will be subject to tax, so residential property owners are able to use the market value of the property as at April 2015 as their base cost for calculating the gain. 

The new rules apply to all non-resident individuals, non-resident trustees, non-resident companies and the personal representatives of a deceased non-UK resident. Non-residents in partnership will also be subject to the new rules to the extent they are entitled to the gain on disposal.

Rate of tax

Companies are charged CGT at the UK corporation tax rate (20% from 1 April 2015), and individuals are charged at 18% or 28%.  Trustees are taxed at the trust rate of 28%. 

Reliefs and exemptions

The following will be excluded from the new CGT rules:

  • communal residential property, such as boarding schools and nursing homes;
  • UK REITS;
  • UK residential property held by diverse institutional investors;
  • purpose built student accommodation consisting of at least 15 bedrooms and occupied more than 50% of the tax year by students;
  • accommodation excluded from registration under the Housing Act 2004 (houses in multiple occupation) being controlled or managed by higher or further education establishments.

Non-UK residents also have access to the annual capital gains tax allowance (currently £11,000).

Principal Private Residence Relief ('PPR') is also available to non-UK residents, but only if the non-UK resident or their spouse or civil partner is resident in the property for at least 90 days during the tax year. If PPR is available then no CGT would be due on any gains. This is likely to have implications for non-UK residents who need to spend fewer than 90 days in the UK in order to remain non-UK resident.  

Interaction with ATED

From April 2013 CGT was imposed on the sale of residential property by non-UK resident companies which fell within ATED.  The ATED rules were designed to limit the benefit of holding UK residential property through a corporate structure (known as 'enveloping'). Companies and other "non-natural persons" are subject to ATED if they own UK residential property which has a market value above £1 million. This is now to be extended to properties with a market value above £500,000 from 1 April 2016. The ATED charge increases depending on the value of the property as set out below.

There are a number of exemptions and reliefs from ATED.  These include reliefs in relation to property rental businesses, property developers, property traders and financial institutions which acquire dwellings in the course of lending.

All companies and other "non-natural persons" that own UK property and are subject to ATED are also subject to ATED CGT on any gains arising from 1 April 2013 at a rate of 28%. Companies and other entities subject to ATED will continue paying the ATED CGT charge even where liable under the new rules. Where the two overlap, the ATED CGT charge will take priority over the new CGT rules, which prevents gains being taxed twice. 

Changes proposed in the Summer Budget 2015 

Under the current rules, where a foreign owner holds UK residential property directly this is subject to inheritance tax ('IHT') at 40%, subject to the usual reliefs. However, if the property is held through an offshore company, there is no IHT charged on death (because the deceased owned shares in a foreign company which is not a UK situs asset). This means that, despite the ATED rules outlined above, for some individuals there could still be a significant inheritance tax incentive to keep property "enveloped".

To counteract this, the government plans to remove the IHT advantages of holding UK residential property in this way.  The government has announced its intention to bring in legislation so that from April 2017 foreign owners or offshore trusts owning UK residential property through an offshore company, partnership or other opaque vehicle will pay IHT on the value of that property where a chargeable event occurs.  The IHT charge will be based on the ATED rules, but the full details have not yet been finalised. The government has said it will consult on the details of these proposals at the end of this summer.  It is envisaged that legislation will be included in the Finance Bill 2017 and that any changes will be effective from 6 April 2017.