Capital gains tax to be payable by non-resident property owners, confirms Chancellor

At present only UK resident individuals are subject to CGT on gains made on residential properties. CGT is payable by UK residents at 18% for basic rate taxpayers and 28% for those paying tax at higher rates. UK residents do not pay capital gains tax in respect of a property which is their principal private residence – their only home or, if they own more than one property, the one nominated as their main residence.

Ray McCann, a tax expert at Pinsent Masons the law firm behind Out-law.com said "Whilst the chancellor has suggested that this is intended to be fair, as matters stand owners of residential property in the UK who use that property as a  home do not pay capital gains tax so it remains to be seen whether that will apply here and in the end the new charge  may not be a major money spinner for the Treasury – but it would remove the anomaly whereby a non-resident investing through a company pays UK CGT, whereas a non-resident investing directly does not."

Today's announcement follows the introduction in April of a CGT charge on residential properties held through companies. CGT is payable at 28% in respect of gains accruing on the disposal of interests in high value residential property that is subject to the annual tax on enveloped dwellings (ATED).  ATED is payable in respect of residential property valued at over £2 million held by a non natural person, such as a company.

For the CGT charge on properties held through companies, unless an election is made to use the value of the property on an earlier date, only gains or losses on the property arising since 6 April 2013, or if later the date the property was acquired, are relevant when working out the charge to CGT. ATED is charged by reference to the value of the property on 1 April 2012, or its subsequent acquisition.

McCann said that non-resident property owners "need not take any immediate action" as the charge will not apply until April 2015 and "it is almost certain that gains accrued up to that date will be "grandfathered".  He said that this should mean that there will be sufficient time for any restructuring of investments once the details of the charge are known. He said that the changes will probably apply to non-resident trusts as well as individuals. However, the main residence exemption already applies to many trusts.

Full details of the proposed new charge have not yet been published - as there will be a consultation on the proposals in early 2014.  

"For many non-residents the impact of this charge will depend upon the tax regime in their country of residence and the terms of any double tax treaty with the UK. Most double tax treaties provide that capital gains from land and buildings may be taxed in the country in which they are situated. Any UK tax payable would normally be credited against any liability for tax on capital gains in the non-resident's home country although some countries do not impose capital gains tax. If the liability in the home jurisdiction is more than or equal to the UK liability in the UK, the change will simply shift the tax revenues from the country in which the non-resident resides to the UK, without costing the non-resident any more." McCann said

The CGT relief for only or main residences applies even if you have not been living in the property for the final three years of your ownership. The Chancellor has announced that from 6 April 2014 the final period of three years that is currently exempt from capital gains tax where the property has been a main residence is to be reduced by half to 18 months. Ray McCann said "This will cause issues only to a small number of individuals who have been abusing the extra relief." 

Jason Collins of Pinsent Masons said "It is interesting that the halving of the CGT relief is trumpeted as an attack on "avoidance" and an "exploitation" of the rules when the measure is a relief set out in statute which is freely available and which specifically produces an arbitrary result by reducing the tax which is in principle due."

Other changes confirmed by the Chancellor include penalties for users of failed avoidance schemes who do not immediately fold without good reason when a related scheme loses before the Courts and a new proposal to require the scheme user to pay the tax in a dispute with HMRC if they want to continue their own fight.

The Autumn Statement published by the Treasury said that "This will provide HMRC with an additional tool to address a legacy stock of an estimated 65,000 avoidance cases, around 85% of which date back to before 2010".  HMRC says that this will "remove the cash flow advantage of sitting and waiting during an avoidance dispute". It is expected to raise £700 million.

"These measures include the usual mix of cat and mouse measures plus attempts to take away some of the collateral benefits of avoidance, such as cash flow advantages. However, the requirement to pay will only kick in once the lead scheme has been litigated - which can take many years so a significant cash flow benefit remains. Expect this idea to be expanded so that tax must always be paid at the start of any enquiry when tax avoidance is alleged, stopping the cash flow benefit in its tracks" said Jason Collins.