Disposal of UK residential property by non-doms that is 'genuine business activity' to be caught by new CGT rules

Out-Law News | 01 Apr 2014 | 11:21 am | 3 min. read

There will only be limited exclusions from new rules extending the scope of capital gains tax (CGT) to gains made on the disposal of UK residential property by non-residents, according to a consultation on the proposals by HM Revenue and Customs (HMRC) and the Treasury.

 The consultation sets out the proposed scope and likely design of the new regime, which is due to come into force from April 2015.

"The government has made it clear that they see genuine business activity as within the scope of the CGT charge, so the exemptions applying to ATED and SDLT for property rental businesses will not be available," said property tax expert John Christian of Pinsent Masons, the law firm behind Out-Law.com. "Those looking to raise funds for investment into UK residential letting will need to structure their funds as a REIT or a diversely held fund to avoid a CGT charge at the fund level."

"The government acknowledges that the charge is not intended to catch residential property for communal use such as nursing or care homes, but that student accommodation will be within the regime unless it is a hall of residence attached to an institution," he said.

The Chancellor of the Exchequer announced his intention to include gains made by non-UK residents selling UK residential properties within the scope of CGT as part of the 2013 Autumn Statement. UK resident individuals are currently subject to CGT on gains made on residential property, providing that property is not their principal private residence or, if they own more than one property, the one nominated as their main residence. CGT is payable at 18% for basic rate taxpayers and 28% for higher rate taxpayers.

In April 2013, the government introduced a CGT charge on residential properties held through companies, payable at 28% in respect of gains accruing on the disposal of interests in high value residential property that is subject to the new annual tax on enveloped dwellings (ATED). ATED was also introduced in April 2013, and is currently payable in respect of residential property valued over £2 million held by a company or other non-natural person. However, dwellings purchased as part of a genuine property rental business, held for charitable purposes or run as a commercial business are exempt from this charge. At the 2014 Budget, the government announced that the threshold for ATED is to be reduced from £2m to £500,000 in stages.

According to the consultation, the new CGT charge for non-residents is aimed at improving the "fairness" of the UK tax system and to "address the current imbalance between the treatment of UK and non-UK residents disposing of UK residential property". The change will also bring the UK into line with many other countries, which already charge CGT based on the location of the residential property rather than the location of the seller.

As set out in the consultation, the new charge will apply from April 2015 but only in respect to gains arising from that date. It is intended to target properties "used or suitable for use as a dwelling", including property that is in the process of being constructed or adapted for such use. Property used to generate income from letting or used as an investment will also be subject to the tax. Disposal of UK residential property owned by non-UK residents through vehicles such as companies, trusts, partnerships and certain types of funds would also be caught by the change.

The government does not intend to tax most forms of residential property that is primarily for communal use, such as boarding schools and nursing homes, under the new regime. However residential accommodation for students would not be excluded, unless it is part of a hall of residence. In addition, disposals of multiple dwellings in a single transaction would not be excluded from the CGT charge, despite beneficial treatment under the SDLT regime.

Property owned by funds that have genuinely diverse ownership (GDO), or property owned by pension funds, would not be caught by the new regime as proposed. Property owned by foreign real estate investment trusts (REITs) will also not be taxable, to the extent that the foreign REIT is equivalent to a UK REIT.

Tax for non-UK resident individuals would be charged in line with existing UK CGT rates, and the annual exempt amount would also be available. Whether the individual is subject to the lower or higher rate of tax would depend on their total taxable income and gains for that particular year. Taxpayers would also be entitled to relief on their main private residence in certain circumstances, bearing in mind that a UK residence is unlikely to be the main residence of a non-resident.