Jenna Fyfe CTA
Posted on 15 Mar 2018

Non-Resident Capital Gains Tax - Flaws in HMRC Guidance

Non-resident Capital Gains Tax ('NRCGT') was introduced from 6 April 2015 and applies not only to non-resident individuals, but also to non-resident trusts and closely held companies that sell or give away UK situs residential property.

When a UK residential property is sold or given away, an NRCGT Return should be submitted to HMRC within 30 days of completion, whether or not there is a tax liability. Therefore, all disposals, even those resulting in nil gain/nil loss or a capital loss position are required to be reported to HMRC within this time frame, otherwise penalties are applied for late submission. The late filing penalties follow a similar structure to the late submission of a self-assessment tax return, i.e. £100 immediate late filing penalty in all cases where the return is one day late, plus a further penalty of 5% of the tax due or £300 if greater for returns over 6 months late; plus a further penalty of 5% of the tax due or £300 if greater for returns over 12 months late.

HMRC have recently confirmed that although their initial guidance set out that penalties of £10 per day could be applied for returns that are filed between 3 and 6 months late, this has now been withdrawn and previously issued £10 per day penalties have been cancelled.

Despite HMRC setting out the above penalty regime, there have been two tribunal cases where NRCGT late filing penalties issued by HMRC have not been enforced. Firstly, McGreevy v HMRC [2017] was a case where it was upheld that the taxpayer had a 'reasonable excuse' for failing to submit an NRCGT return because the judge believed that HMRC had failed to disseminate sufficient and timely information about the new obligation to relevant taxpayers. The taxpayer in this case thought that they could declare the disposal in their self-assessment tax return and was not aware of the 30 day time limit imposed by the NRCGT legislation.

Secondly, in the case of Patsy-Anne Saunders v HMRC [2017], a First-tier Tribunal judge held that where a non-resident taxpayer made a loss for NRCGT purposes, there was no obligation to file a NRCGT return, based on a strict reading of the legislation of section 12ZA and 12ZB of TCGA 1970 which directly contradicted HMRC guidance on the basis that the individual was not a "taxable person" given that she had made a loss on the disposal of her property.

In addition to the discrepancy in the legislation compared to HMRC guidance described above for the case of Patsy-Anne Saunders v HMRC [2017] in respect of late filing penalties, it appears that there is another deviation in the manual compared to the legislation with regards to NRCGT and holdover relief for trusts.

In cases where a non-resident trust wishes to appoint a UK property to a non-resident beneficiary, the legislation states under new section 261ZA TCGA (inserted by Finance Act 2015) that holdover relief is available on a chargeable transfer of a property from a non-resident to a non-resident that would otherwise incur NRCGT.  The legislation is clear.  It modifies the 'normal' s.260 rule and, as a consequence, non-resident CGT disposals to non-resident transferees are subject to hold-over relief.

However, HMRC Guidance HS295 (2017) (updated 6 April 2017) states:

"Hold-over Relief is available for a chargeable transfer of a property from a non-UK resident to a UK resident that would otherwise incur non-resident Capital Gains Tax". This is correct, if misleading.

It also states:

"In all cases the transferee must be resident in the UK." This statement directly contradicts the legislation mentioned above at section 261ZA TCGA.

We contacted a technical adviser at HMRC who also confirmed that one of the qualifying features they look for in assessing hold-over relief is that the transferee must be UK resident. If the transferee is not UK resident then they will deny the relief.  Again, this is inconsistent with the current legislation.

In conclusion, it appears that, despite the NRCGT regime being in effect for nearly three years now, there are still major flaws with the NRCGT regime concerning discrepancies between the legislation and HMRC guidance that we hope HMRC will address as soon as possible. Until then, we will continue to make our clients who are non-residents aware of their reporting obligations, as well as submitting hold over relief claims in line with the legislation under section 261ZA TCGA, which may be challenged by HMRC by virtue of their contradictory guidance manual.

If you would like any advice about NRCGT or would like us to file an NRCGT return on your behalf, please contact Jenna Fyfe.