From April 2015, UK citizens who are living abroad will have to pay capital gains tax (CGT) on the sale of UK residential property. There are an estimated 4.5 million* Britons currently working, studying or retired abroad, many of whom still own property in the UK.
They can currently sell their property without paying CGT, but gains that arise after next April will be subject to tax 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-residents.
Capital gains tax legislation
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 individuals and companies that own property.
- 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 being 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.
The new legislation brings the UK into line with most other countries’ taxation of nonresidents holding property.