This article is kindly contributed by Stephen Hemmings, a corporate tax director at accounting firm Menzies LLP.
A number of recent changes have added complexity to the taxation of UK residential property and potentially give rise to a charge to taxation which did not apply previously. Some of the key changes are explored below. Individuals, companies, residents and non-UK residents may be affected.
New CGT charge on non-residents
From April 2015, non-UK residents will be subject to a UK capital gains tax charge on the disposal of UK residential investment property. Previously non-UK residents were exempt from capital gains on the disposal of all UK assets. As well as international investors the new rules will also apply to UK citizens, such as retirees, living or planning to live abroad who previously could sell their homes without suffering UK capital gains tax. There are an estimated 4.5 million* Britons currently working, studying or retired abroad, many of whom still own property in the UK
Draft legislation is not yet available but the government has published a consultation paper. The key points are as follows:
- The regulations will apply to both individuals and companies that own property.
- The tax will only apply to capital gains arising after April 2015. This indicates that property values will be rebased from this date.
- Individuals will be taxed at either 18% or 28%, depending on the owner’s level of income. The annual CGT exemption, currently £11,000, will be available to non-resident individuals. The rate to be levied on companies has not been confirmed but we would expect it to range for 20% to 28%.
- Principal private residence relief, which is broadly available to UK individuals on their main residence, will only be available to non-residents in limited circumstances.
- Residential accommodation for students is specifically caught by the proposed rules, although it is proposed other communal accommodation such as boarding schools and nursing homes will not be.
- All non-resident trusts will be subject to CGT in respect of UK residential property held. Although non-residents investing in UK residential properties through a UK or foreign REIT (Real Estate Investment Trust) should not be subject to UK CGT. A further extension of the charge will be made in respect of other collective investment schemes.
The government will apply the charge through a new withholding tax applied at the point of sale of the property. The non-resident will have to pay the withholding tax, or the actual tax due, within 30 days of the sale. HMRC is currently proposing that solicitors, accountants and others involved in the sale should be responsible for identifying non-resident vendors and collecting the withholding tax.
The government has now introduced two separate regimes that could apply to non-resident companies holding UK residential property. The other regime is the annual tax on enveloped dwellings regime (ATED), which applies to residential property worth over £500,000 that is owned by a company. The government will have to confirm how the two regimes will interact, however, we expect that different rules, exemptions and reliefs will apply across them both.
For example, a non-resident company holding UK residential property as part of a genuine commercial investment would qualify for relief from the ATED rules, but would be subject to capital gains tax on a future disposal of the property.
Changes to principal private residence relief
Reduction in period of absence allowed
Principal private residence relief applies to exempt from tax any gains on the disposal of an individuals main residence. The relief also applies if you move out of your home for a period before it is sold. This recognises the fact that it may not always be possible to sell the property immediately. This allowed period of absence before disposal was previously 36 months, however from April 2014 the government have halved this to 18 months. One exception is where individuals have moved into a care home, in this circumstance the allowance for the period of absence remains at 36 months.
Further mooted changes to claiming PPR
The government has announced plans to change the rules of capital gains tax and limit the scope of private residence relief (PPR) given to homeowners.
Currently, anyone owning two properties that they live in from time-to-time, such as a flat in London and a larger house in the country, can tell HMRC which one is their principal private residence. When that property is subsequently sold, it will qualify for relief from capital gains tax through PPR.
Typically, UK residents with two homes would make exempt the property carrying the larger capital gain. However, if the government’s proposed changes go through, individuals will no longer be able to elect which residence is exempt from capital gains tax. Instead, HMRC will make the decision.
There are two ways in which HMRC might reach a decision. The first is to consider the balance of evidence such as where the family lives, where post is sent and where the property owner is registered to vote. The second would be a fixed rule that identifies a person’s main residence based on the time spent at the property.
Reduction in values of property caught by ATED rules
The ATED regime discussed earlier previously applied to companies holding UK residential property with a value of over £2m. As a recap this regime was introduced primarily to discourage overseas investors from holding UK property in companies, as a means of avoiding SDLT.
Companies caught by the regime are subject to a 15% SDLT charge on a relevant property purchase, an annual charge and a 28% CGT charge on disposal of the property. Please note that commercial businesses should be able to claim a relief from all the charges.
From 20 March the 15% SDLT charge now applies to relevant purchases over £500k and the other two provisions will apply to property values over £1m from 1 April 2015 and £500k from 1 April 2016.
More detail on the annual charge levels and available reliefs are set out at towards the end of this article.
Most worrying for UK property owners is the so called mansion tax, which has been widely debated in the media. This could apply to residential properties however they are held, and would effectively be a broadening of the ATED rules.
At the moment there are no solid plans to implement such a tax, and its future may well depend on what political party or parties are in power following the next election. However, the fact that it is widely been discussed suggests that the increased taxation of UK property is an area which politicians feel can be exploited to boost government revenues.
ATED reliefs available – all must be claimed on an annual return
- Let to third party on a commercial basis
- Property trader business
- Property developer business
- For the use of employees as part of a commercial business
- Open to the public for at least 28 days per annum
This article has been prepared for general guidance only. It is not intended as advice and neither the author nor Menzies LLP accepts any responsibility for any loss arising from acting or refraining from acting as a result of any material in it.