Implementation of a Capital Gains Tax Charge on Non-UK Residents

In his 2013 Autumn statement, the Chancellor confirmed the intention to extend the scope of UK Capital Gains Tax (“CGT”) to include the disposal of UK residential property by non UK residents.

The Government released a consultation document in March 2014 setting out the proposed changes. The charge will come into effect from April 2015 and will only apply to gains accruing from that date onwards. The charge does not apply to disposal of commercial property or land; only residential property.

Currently where a UK resident individual disposes of UK residential property, the gain is subject to CGT at 18% or 28% depending on whether they are a basic rate or higher rate tax payer. However, an exemption known as Principle Private Residence (“PPR”) Relief is available where the property has been their main residence. Individuals with more than one home can currently submit an election to HM Revenue & Customs (“HMRC”) to determine which property should be treated as their main residence for the purpose of this relief.

Non resident individuals, however, are not subject to UK CGT on the sale of UK residential property, whether PPR relief is available or not.

Any gain on the disposal of residential property by non UK residents will be taxed in the same way as for UK residents. The non resident individual will qualify for the annual exemption (£11,100 for 2015/16) and the applicable tax rate of 18% or 28% will be applied depending on the level of their UK income. There will also be a mechanism to allow non-residents to claim a capital loss.

The consultation paper has proposed that any CGT due could be collected by way of a withholding tax mechanism and it is expected that it will be the responsibility of the seller or agent to withhold this tax and pay it across to HMRC. When the non-resident individual’s tax return is submitted, any over or under payment of withholding tax will be reconciled at that time.

As mentioned previously, under the current system individuals with more than one residence can elect which one of their properties they want to qualify for PPR. However, without a change in these rules, non UK residents could simply elect for their UK home to qualify as their PPR to avoid a UK CGT charge. It is therefore proposed that either the election mechanism is removed and your main residence is determined by fact or the election mechanism is replaced with a fixed rule which identifies a person’s main residence on the basis of, for example, time spent in the property.

If this comes into effect, this will have an impact on both UK resident and non–UK resident individuals.

HMRC have now published minutes from the working groups that contributed to this consultation and will issue a full response in early Autumn 2014.

If you require any further information in the meantime, please contact Natalie Gemmell (natalie.gemmell@aab.co.uk) or Jill Walker (jill.walker@aab.co.uk) or your usual Anderson Anderson & Brown LLP advisor.