More tax changes affecting UK residential property – part 2: Capital Gains Tax (CGT) on residential disposals by non- residents and changes to UK inheritance tax for non-doms

Historically, unlike UK residents who are generally liable to CGT on disposals of UK residential property (other than their principal residence), non-residents have been able to dispose of such property potentially free from UK CGT.

The UK government sought to address this inconsistency by introducing a CGT charge in the Finance Act 2015 in respect of disposals of residential property by non-UK resident:

• Individuals
• Trustees
• Personal representatives
• Closely held companies
• Certain unit trusts

NRCGT applies to disposals made on or after 6 April 2015. Property is rebased to its market value as at 5 April 2015 such that only future gains in excess of that value will be subject to NRCGT. The taxpayer may, in certain circumstances, elect to time apportion the gain over their period of ownership on a straight-line basis such that the post-5 April 2015 gain is subject to NRCGT or, alternatively, may elect to subject the whole gain over the ownership period to NRCGT.

Broadly, if there are any NRCGT losses, these are ring fenced and set off against other UK residential property gains. Notably, any disposal of UK residential property must be reported to HMRC, even if a loss results.

Certain properties are not subject to NRCGT, for example:

• Care or nursing homes
• Some student accommodation
• Hospitals/hospices

The rate of NRCGT is 18% or 28% for individuals (depending on the level of taxable income/gains for the relevant tax year), 28% for trustees and personal representatives and 20% for companies.

Principal Private Residence Relief

Principal private residence relief (PPR) may be available to non-residents who use the UK residential property as their sole or main home, provided certain conditions are met. If PPR applies to a NRCGT disposal, any NRCGT gain will be exempt.

PPR is only available to non-residents if the individual or their spouse/civil partner were either living in the UK for that tax year, or spent at least 90 nights (not necessarily consecutively) at the property (or any UK property) in the relevant tax year. If the tax payer only owned the property for part of the year, the 90 days will be time apportioned.

Interaction with ATED-related CGT

The ‘Annual Tax on Enveloped Dwellings related CGT’ (or ATED-related CGT) brought certain ‘high-value’ dwellings (currently dwellings with a value in excess of GBP 1 million, falling to GBP 500,000 from 1 April 2016) within the charge to UK CGT and was the forerunner to the NRCGT charge (which applies irrespective of the value of the dwelling). However, ATED-related CGT (charged at the rate of 28%) takes precedence, with NRCGT only applying to those gains not subject to ATED-related CGT.

Indirect ownership of UK residential property and IHT

Until now, a common form of IHT planning for non- UK domiciled individuals has been to own UK property indirectly through an offshore company, so that one could argue that the relevant asset owned for IHT purposes was a non-UK situs asset, being the shares in a non-UK company so called “enveloping” of UK property. This, of course, gives rise to other tax consequences, such as higher stamp duty land tax charges, the annual tax on enveloped dwellings or ‘ATED’ and (as referred to above) ATED-related CGT.

The changes announced in the UK Summer Budget will render this form of IHT planning ineffective from April 2017. The new rules will mean that shares in an offshore company or similar vehicle will no longer be “excluded property” for IHT purposes to the extent they derive their value directly or indirectly from, or it is otherwise attributable to, UK residential property. The effect is, broadly, that the same IHT charges and reliefs will apply as if the UK residential property was held directly by the owner of the offshore company.