We all realise that we live in a world where governments have for many years spent more than they have earned, and are trying to balance their books in an environment where household incomes are squeezed. A tax rise is never popular, so what could be better (from the Government’s point of view, at any rate) than inflicting one on somebody who cannot vote against you?
It might be a slightly cynical point of view, but that is nonetheless what the UK Government have done by extending the scope of Capital Gains Tax to non-UK residents who own residential property situated in the UK. Fortunately, there are some very simple steps you can take that will help to protect historic (that is, pre-6 April 2015) gains from UK tax.
Who is affected?
The majority of persons owning UK residential property, either as an individual or via a company, will almost certainly be affected by the changes, which came into effect on 6 April 2015. The definition of “residential property” is wide and, to all intents, includes any building that a person can live in.
At present, the new rules do not extend to commercial property such as shops, factories, warehouses, etc. Any gains realised on sale of these types of property by non-UK residents currently remain outside the scope of UK tax.
What has changed?
In brief, Capital Gains Tax (“CGT”) may be charged on a non-UK resident who sells a residential property of any value, where the sale is completed on or after 6 April 2015.
Historically, CGT has only been paid by individuals or companies that are resident in the UK; any gains arising on the sale of UK property have been tax-free for Bailiwick of Guernsey residents. From 6 April 2015, UK CGT will be paid by non-residents in the same way that it is paid by UK residents.
There is no change to the Guernsey tax position – Guernsey does not charge tax on capital gains.
Are there any exemptions?
There are some limited exemptions, particularly in respect of purpose-built student / armed forces accommodation, or where the property has previously been occupied as your main residence. These have been drafted primarily to protect large institutional investors, and we do not expect that many small-scale landlords will be in a position to benefit from them.
How is the tax calculated?
CGT is calculated differently for companies and for individuals – the same disposal would give rise to different taxable gains, to which different rates of tax would be applied.
Individuals will receive the same annual CGT allowance that is available to UK residents – for the 2015/16 tax year, this means that the first £11,100 of any gain will be exempt from tax. The remainder of the gain will be taxed at 18% or 28%, depending on the total UK income and gains arising in the year.
During the 2015/16 tax year, for an individual, the higher rate will be charged once total taxable income and gains (calculated after deducting any available tax-free allowances) exceed £31,865.
It is worth noting that, where a property is jointly owned (e.g. by husband and wife), each owner will be entitled to an annual allowance and basic rate (18%) tax band (in 2015/16, this would mean that the first £22,200 of any gain was exempt from tax).
Companies are taxed at a flat rate of 20% on the entire gain – there are no tax-free amounts for companies, but they are entitled to claim an “indexation allowance” (effectively, increasing the initial purchase price in line with inflation).
It is worth noting here that companies may be exposed to other taxes that do not apply to individuals, particularly the Annual Tax on Enveloped Dwellings (“ATED”).
ATED is payable for every year during which a “high value” property is available for the private use of the company’s owners, or persons connected to them. The definition of “high value” was initially set at £2 million, but has been extended on more than one occasion and will include all properties valued at £500,000 or above with effect from 6 April 2016. In addition, the capital gains tax liability of a company that is subject to ATED is calculated at a rate of 28%.
What should I do now?
If you have owned UK property for a number of years, the most important point is to obtain an opinion of its value as at 5 April 2015. It is possible to elect for alternative treatments, but in the majority of cases this will be your “base cost” for the purposes of calculating any tax liability on sale – only an increase in value after 6 April 2015 is taxable.
The type of valuation you need to obtain will depend on individual circumstances. HMRC have historically been disinclined to accept estate agent’s opinions, and many people consider that a relatively inexpensive report from a Chartered Surveyor is a worthwhile investment where substantial pre-April 2015 gains exist. However, if a property has been purchased more recently, and is not believed to have increased in value, an estate agent’s opinion may be sufficient.
Moving forwards, it will be important to retain receipts for any substantial improvements to property that might increase its capital value such as, for example, an extension or replacement of a lean-to with a new conservatory – these costs can be deducted when calculating capital gains on sale.
Ask for advice!
Most importantly, speak to us before you sell. We can advise you on the information you will need to gather to calculate any capital gain, and the tax due. It may be possible to take simple steps to minimise liabilities (particularly if more than one property is to be sold) but only if action is taken before the sale completes.
A return must be made to HMRC to inform them of the sale, and provide a computation of any gain arising, within 30 days of completion of the sale. Unless you already complete UK self assessment tax returns, and tax due also needs to be paid within this timeframe. Penalties apply where the return is not submitted on time (even if there is no tax liability).
If you own, or are thinking of investing in, UK residential property and would like to discuss how these rules impact on your particular circumstances, please get in touch with me.
Colin Jeffreys, FCCA
6 April 2015
This article has been prepared as a general guide. It is not a substitute for professional advice. Neither Collenette Jones Limited nor its directors or employees accept any responsibility for loss or damage incurred as a result of acting or refraining to act upon anything contained in or omitted from this document.