New UK Capital Gains Tax

KOTA KINABALU: For Malaysian property investors, especially in the London property market where some Malaysian developers, welcomed by Mayor Boris Johnson are active in projects, the United Kingdom Government will introduce new Capital Gains Tax (CGT) on the sale of UK residential property with effect from April 6, 2015.

Following on from the consultation document issued on March 28, 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) will operate.

The tax is only effective on gains after April 6. The gain can either be calculated by revaluing at April 6 or by time apportioning the gain over the period of ownership.

In certain circumstances, Malaysian investors 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.

Malaysia can learn from this UK spirit of giving ample notice on Government policy changes, as 2014 is such a year of uncertainty in the Malaysian property market contributed to by seemingly some unpredictable Governmental measures.

A politician said businesses should not use the seemingly misleading pre-GST sale tagline but there is no wrong with boosting pre-GST commercial or industrial property sales in Malaysia prior to April 1, 2015 because commercial or industries properties are not going or likely to be cheaper after.

Even GST-exempt residential properties are expected be priced upwards as other costs appreciate. Thinking and being smarter should not be taken as offensive. It’s just common sense. UK property has performed exceptionally well historically and this is has a lot to do with it being a fair, transparent and worthy investment.

As for the UK, the introduction of this tax will supposedly bring fairness on the sale of UK residential investment property by non-residents by bringing it 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 gains made by “diversely held institutional investors” – this will be tested to ensure sale by individuals and connected parties will pay CGT.

Companies Tax will be 20 per cent (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 i.e. where the sale is over £2m and the property was not rented out, then the charge will remain at 28 per cent as it is now.

The threshold will reduce to £1m on April 6, 2015 and to £500,000 on April 6, 2016.

For individuals, tax will be 18 per cent or 28 per cent depending on the total UK income and gains plus the first £11,000 will be tax-free (same as paid by UK residents).

As for trustees, tax will be 28 per cent (same as paid by UK resident trustees). The annual allowance for trustees is half the amount available to individuals.

Any losses can be carried forward to offset against any future gains on the sale of UK residential property. As for 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-residents – you will only be permitted to claim PRR in any year of ownership if you were a 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.

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 April 6 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 five or fewer persons (including connected parties) or non-resident companies controlled by five 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.

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 HMR Customs and has a self-assessment record they will again 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.

Whilst there are a number of changes being implemented, it is expected that the London property market will continue to offer investors attractive returns and the tax will not have any significant effect on the market.