Following on from the consultation document issued on 28 March 2014, the Government has now released a summary of the responses that were received and draft legislation for the 2015 Finance Bill which outlines how the new Capital Gains Tax (CGT) on the sale of UK residential property will operate effective from 6 April 2015.
The introduction of this tax brings fairness to the sale of UK residential investment property by nonresidents in line with UK Residents, and also in line with many other countries around the world.
CGT will not apply on commercial property, communal residential property or any made by “diversely held institutional investors” – this will be tested to ensure sale by individuals and connected parties will pay CGT.
RATE – Companies
Tax will be 20% (same as paid by UK companies) plus there will be an indexation allowance to account for inflation. Groups of company will be able to enter into “pooling” arrangements. Where the sale is subject to the annual tax on enveloped dwellings, (ATED) related capital gains ie where the sale is over 2m and the property was not rented out, then the charge will remain at 28% as it is now. Note the threshold will reduce to £1m on 6 April 2015 and to £500,000 on 6 April 2016.
Tax will be 18% or 28% depending on the total UK income and gains PLUS the first £11,000 will be tax free (same as paid by UK residents)
Tax will be 28% (same as paid by UK resident trustees). The annual allowance for trustees is half the amount available to individuals.
Losses can be carried forward to offset against any future gains on the sale of UK residential property.
PRIVATE RESIDENCE RELIEF (PRR)
UK residents are exempt from CGT on the sale of their principle place of residence. This will be available to non-esidents – you will only be permitted to claim PRR in any year of ownership if you were tax resident in the UK in the year of disposal or have resided in that property for 90 days in that year. Where the property has been the main residence at any time over the period of ownership the gain in the final 18 months of ownership will qualify for PRR.
Tax is only effective on gains after 6 April 2015. The gain can either be calculated by revaluing at 6 April 2015 OR by time apportioning the gain over the period of ownership (although time apportionment is not available to ATED related gains). In certain circumstances you may choose neither to rebase nor time apportion and instead use the original purchase price when calculating the gain which is also permitted.
It is expected that the majority of non-resident property owners will prefer to revalue their units which is considered the default position. We have negotiated with a specialist surveyor who will be able to carry out valuations:
Desktop valuation – £350 plus VAT
2 page report with internal inspection and 2 comparables – £550 plus VAT
Detailed report – £1000 plus VAT
To instruct a valuation please contact Monika Semanova (email@example.com tel 020 7319 9730) and she will arrange.
OFF PLAN / NON COMPLETED SALES
Selling any right to acquire a UK residential property “off plan” before it has actually been constructed/completed, will be subject to tax in the same way as if it were the sale of a completed property i.e. you can get a valuation done on 6 April 2015 or apportion on a time basis.
The charge will also be applied to all types of non-resident trusts. It will NOT be charged on the disposal of shares or units in a fund (eg a pension fund) as long as a ‘genuine diversity of ownership’ test is passed.
Foreign Real Estate Investment Trusts (REIT’s) will be excluded as will non-residents using UK REIT’s to invest in residential property.
For companies there will be a ‘narrowly controlled company’ test to ensure that only companies that are private investment vehicles for individuals, families or connected person are included in the charge.
To ensure large scale institutional investment is not discouraged, the charge will not apply to qualified institutional investors, non-resident companies controlled by 5 or fewer persons (including connected parties) or non-resident companies controlled by 5 or few persons where one of those persons is a qualified institutional investor. The interests of closely related family members will be aggregated when establishing the number of persons controlling a company.
REPORTING AND PAYMENT
The reporting and collection mechanism is not yet finalised. It will be based on a payment on account process rather than a withholding tax.
Non-residents will be required to notify HMRC within 30 days of the disposal, even if there is a loss or the gain is below the annual exempt amount.
Any PRR relief being claimed needs to be notified.
Where a non-resident already has a relationship with HMRC and has a self-assessment record they will report and pay the gain in their annual self-assessment tax return. A payment on account can be made in advance should the taxpayer choose to do so.
For those without a relationship with HMRC they will be required to complete a return with 30 days of the
disposal and make the payment at the same time.
UK property has performed exceptionally well historically and this is has a lot to do with it being a fair, transparent and worthy investment. Whilst there are a number of changes being implemented, we believe that the London property market will continue to offer investors attractive returns and the tax will not have any significant effect on the market. We will continue to advise our clients as and when updates are announced and we will be providing assistance in the usual way.
Vidhur Mehra, Finance Director
Benham & Reeves Residential Lettings
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