Review of Government consultation – new Capital Gains Tax for Non Residents

I recently wrote about changes to Capital Gains Tax (CGT) for non-residents which were announced in the Autumn 2013 Statement. This stated that a CGT charge would be introduced for non-residents for gains made from the sale of UK residential property from April 2015.

On March 28th, a new consultation document was issued by the Government so I thought it might be useful to update you with the latest changes it contains.

“Implementing a Capital Gains Tax charge on non-residents”
The new consultation document, called “Implementing a Capital Gains Tax charge on non-residents”
provides a proposal on how the tax charge will be implemented and its impact: it asks for feedback
from interested parties by June 20th 2014.

Once feedback has been considered, the scope and structure for the implementation of the charge will be published – this can involve significant changes being made between the consultation process and the final legislation.

Why is the UK Government introducing CGT for non-residents?
The main principle behind the introduction of the new tax is one of fairness. It aims to ensure that the
same Capital Gains Tax rules that apply to UK residents selling a property that is not their main
residence also apply to non UK residents.

The Government also wants to ensure the new tax system is simple to administer and not open to
abuse.

Key points:
No exemption for rented properties
While the new Annual Tax on Enveloped Dwellings (ATED) and ATED related CGT have exemptions for properties rented on a commercial basis, there will be no similar relief for the new Capital Gains Tax.

Applicable to all residential property owners
CGT will apply to all properties, whether the property is sold and the gain made by an individual or a
company.

No minimum property value
There will be no minimum value (as there is for ATED and ATED related CGT).

CGT rates
The consultation document proposes that the CGT will be charged at the same rate as for UK residents. For individuals that is 18% for basic rate tax payers and 28% for higher rate taxpayers. The rate will depend on the total UK income in the tax year of sale.

Annual Exempt Amount
There is an annual exempt amount (currently £10,900) which it is proposed will also be available to non-residents.

Private Residence Relief
UK residents do not pay CGT on the sale of their main home – this is known as Private Residence Relief (PRR). If they have more than one home, they can choose which one is their main residence. This PRR will also be available to non-residents. We have yet to find out what types of evidence will be required to substantiate claims for PRR.

A new type of Capital Gains Tax for overseas companies
UK companies selling a residential property pay Corporation Tax. The consultation document suggests that overseas companies selling a residential property should also pay tax at an equivalent rate, bringing UK and overseas companies into line. Previously overseas companies have been exempt. The consultation suggests a tailored CGT for non-resident companies that is similar to the UK Corporation Tax charge. Details are yet to be decided.

Payment through a withholding tax
It is recognised that there will be difficulties in monitoring the declaration and payment of CGT by non-residents.
Therefore, a withholding tax is proposed to be applied by the agents (usually the solicitor) deducting the relevant amount of tax from the proceeds of a property sale before passing the remainder on to the vendor.

CGT rates for companies
The rate for companies and other entities has not yet been announced but is likely to follow the Government’s objective to be in line with that paid by equivalent UK entities.

Our opinion
There is nothing really new announced here and the new consultation document really only confirms what was widely expected from the autumn statement.

For overseas investors, the key point is that CGT will only apply to future gains (from April 2015) and therefore there is no tax advantage in selling now, before it is implemented.

Investors will have to arrange some sort of rebasing or valuation in April 2015 to ascertain the value of their property/properties in order to calculate future gains.

There are still key questions to be addressed and there may yet be significant feedback and changes to the consultation document.

My belief is that investors should look at the bigger picture – the increase in London property values is showing no signs of weakening and investors continue to make excellent returns, even if new rules mean that a percentage of this will now be paid in taxes. And the new rules only bring taxes for overseas investors into line with those paid by UK residents.

London property has always been resilient to changes and remains a safe haven for investors. We do not expect these changes to make any difference to this.

By Vidhur Mehra, Finance Director