UK: Non-UK Tax Resident Individuals Owning UK Residential Property

Capital gains tax charges from 6 April 2015

The scope of capital gains tax (CGT) has been extended and now applies to gains arising on the sale of UK residential property by non-UK tax residents (non-residents).

Only gains arising after 5 April 2015 are subject to the new charge as a result of a ‘re-basing’ of the property at its market value at that date. Alternatively, taxpayers have the option to either time apportion the gain over the period of ownership, and pay tax on the post 6 April 2015 element of the gain only, or compute the gain or loss over the whole ownership period if this is more beneficial.

The rate of tax applied to the gain, after available reliefs and the annual exempt amount (£11,100 2015/16), is 18% or 28 % depending on the individual’s total UK income and chargeable gains. Almost all Double Taxation Agreements with the UK allow for such CGT to be charged, but with credit for this against any foreign tax payable on the sale.

A non–resident individual disposing of UK residential property has to notify HM Revenue & Customs (HMRC) of the disposal within thirty days of the completion of the sale. If they do not have an established relationship with HMRC (ie a live self assessment record), they must also advise HMRC of the gain or loss and any reliefs claimed and pay the tax liability within the same thirty days. For those with a live self assessment record the tax is payable within the usual self assessment timescales.

Losses on the disposal of UK residential property are ring-fenced for use against gains on such properties by the same non-resident person in the same tax year or carried forward to later years. If the individual becomes UK tax resident, any such unused ring fenced losses will be released to set against general gains.

Private residence relief (PRR)

If an individual disposes of a dwelling used as their only or main residence for at least part of the period of ownership, PRR may be available. No CGT is payable for a period during which PRR applies. If the taxpayer has more than one residence, notice can be given to HMRC as to which is to be treated as the main one.

A UK residential property is only eligible for PRR for any tax year of ownership after 6 April 2015 if:

* the person was tax resident in the UK for that tax year; or
* they spent at least 90 days (midnights) in that property (or another qualifying UK dwelling) in that tax year, the ’90 day rule’.

A non-resident who meets the above 90 day rule in any tax year from 2015/16 onwards will be entitled to PRR for that tax year and consequently may have a reduced tax liability on disposal.

On disposing of a UK residential property, a non-resident can nominate, at the time of reporting the disposal to HMRC, for it to be their main residence for PRR purposes for periods of time during their ownership. This is subject to the above requirement and it can only apply to one property at a time. Earlier notices regarding which property is the main residence can therefore be varied but periods become fixed to a property once applied to a sold property.

Occupation of a residence by one spouse or civil partner will be regarded as occupation by the other (though a day can only count once).Hence, each spouse could occupy the property separately for 45 days and PRR would then be available for that tax year.

Where PRR applies, the linked reliefs for absence, lettings and the 18 month final period may also be available, with the possibility for periods prior to 6 April 2015 to be taken into consideration.

Comments

* The legislation applies to non-resident persons who are partners in a partnership which disposes of a UK residential property. The CGT charge will be based on the partner’s share of the gain.

* Anti-avoidance rules may apply: If an asset (which was owned before an individual left the UK) is sold whilst they are non-resident and they return to the UK within (broadly) 5 years of departure, the gain will be taxable on their return to the UK. This may bring pre-6 April 2015 gains on UK properties into charge in some cases. Future plans as to residence in the UK may therefore also need considering.

* If the individual is present in the UK for more than 90 days, due regard should be given to the new Statutory Residence Test. In some circumstances, this may cause them to be treated as UK resident or be an extra ‘tie’ which may affect the number of days that can be spent in the following two tax years if they are to remain non UK resident. We note that the PRR test requires ‘at least’ 90 days in a property whilst the SRT test is based on ‘more than’ 90 days, so that spending 90 days could satisfy both.

* If gains on UK residential property have been held over and the transferee ceases to be UK resident within 6 years of the date of the gift, they can make an election such that the held over gain is not triggered at that time. This is because, on any sale, the held over gain will now be taxable whether the transferee of the property is resident or non-resident. In addition, there is now scope to holdover gains in some cases where gifts of UK residential property are made to non- residents.

We are happy to review individual circumstances and advise on tax obligations in the UK.