HCR has teamed up with tax experts Grant Thornton to produce a new white paper providing insight into the proposed extension of capital gains tax to non-residents. The consultation document was originally released in March 2014 by the Government in which it set out its plans to implement a capital gains tax charge on the disposal of UK residential property by non-residents. The proposed charge will be effective from April 2015 and applies only to gains arising from that date.

Under the current regime, the disposal of residential property situated in the UK by a non-resident individual is not subject to UK capital gains tax (CGT). The same used to be true for non-resident companies. However, the Finance Act 2013 introduced new rules (the annual tax on enveloped dwellings (ATED)-related CGT extension), effective from 6 April 2013, that extended the scope of UK CGT. ATED-related CGT applies to the disposal by ‘non-natural’ persons, such as corporate entities, of residential property valued in excess of £2 million. The legislation applies such that only gains accruing after 5 April 2013 will be subject to CGT at a rate of 28%. Legislation is to be introduced in the Finance Bill 2015 to reduce the threshold at which ATED-related CGT applies to £1 million from 1 April 2015 and to £500,000 from 1 April 2016.

In contrast, where a UK resident individual disposes of a residential property which is not their main residence, any gain arising will be subject to CGT. Similarly, were the disposal made by a UK resident company, any such gain would be assessable to UK corporation tax at a rate of up to 21% (reducing to 20% from 1 April 2015).

It is the opinion of the Government that the taxation of non-residents under the current UK tax regime is not fair. A consultation was therefore issued setting out the Government’s proposed approach to introducing a charge on non-residents disposing of UK residential property with the view of making the taxation of non-residents comparable to that of UK residents.

The proposed extension of CGT to non-residents will apply only to gains arising from April 2015.

To achieve this, the Government is proposing that residential properties will be rebased to their market value at 6 April 2015, so that only the gain realised after this date will be subject to the charge. The taxpayer will also have the option to time apportion the whole gain over the period of ownership (unless the disposal is also subject to ATED-related CGT). The taxpayer will also have a further option to compute the gain (or loss) over the whole period of ownership, using the same approach used for the ATED-related CGT charges.

Similar to the ATED-related CGT extension, the proposed charge is to target UK residential property that is used or suitable for use as a dwelling. This will include a place that currently is, or has the potential to be, used as a residence, as well as property that is being constructed or converted for such use. There will be exemptions available for accommodation that is provided for communal purposes, eg accommodation at boarding schools and care homes.

Following the consultation period, the Government has decided to build on existing property tax definitions in order to detail the types of property excluded from CGT on non-residents. However, the Government will not make additional exemptions or changes to the definition for accommodation used to provide care.

Other than those specifically excepted, it is proposed that the charge will apply to all other residential property. This is in contrast to the ATED-related CGT charge which is subject to a threshold of property with a value in excess of £2 million (reducing to £500,000).

Click here to request a copy of our white paper which provides a full overview of the proposed changes as well as exploring:

  • What ownership types will be caught?
  • What will be the rate of the proposed charge?
  • How will the tax be collected?
  • Private residence relief (PRR)

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