International – UK Tax reaches beyond the borders
Highlighting changes and a practical explanation to Capital Gains Tax on disposal of UK property .
It has long been the case that most countries tax capital gains realised on disposals of property in their country regardless of the owner’s residence status. by contrast, the uk does not tax non-residents on the disposal of uk property on the basis they are simply outside the scope of capital gains tax (cgt).
The Budget 2014 announced changes to this position, the details of which have been the subject of a consultation which has only recently concluded. The proposed changes, outlined below, extend the CGT regime to UK residential property owned by non-UK residents and will bring a significant number of people into the UK tax regime.
Who will be caught by the new rules?
The new rules will apply to non-UK resident owners of UK residential properties. The term owner applies not just to individuals but to companies and trusts also. A type of ‘close company’ test will be applied to ensure institutional corporate investors are not caught. Partnerships themselves are not included but this is because the CGT transparency rules place the charge on the partners themselves.
What property types will be caught?
The charge aims to target all UK residential property which includes a place that is currently, or has the potential to be used as a residence as well as property that is being constructed or converted for such use. This includes rental properties but specifically excludes a residence which is the taxpayer’s only or main residence. However the test for what qualifies as a main residence for a non-UK resident is likely to be revisited.
When will the new charge be implemented?
The charge will apply to gains arising from April 2015 onwards.
How will the charge be implemented?
The specifics of the charge are still unclear. Many are hopeful that there will be a rebasing of the property at April 2015, to set the acquisition cost. Alternatively the gain may simply be time apportioned. Given that a rebasing option applied for the Annual Tax for Envelope Dwelling (ATED) tax charge this would seem the most likely option.
The rate of tax for individuals appears to mirror the rules for UK residents. If the non-UK resident’s UK income is less than the basic rate band, tax will be initially charged at 18%. Otherwise the rate will be 28%. The good news is that the annual CGT exemption will be available to non-UK resident individuals and trusts.
How will the charge be collected?
It is anticipated that CGT will be collected by way of a withholding tax at the point of the property transaction. This would be similar to the collection of stamp duty land tax and is the way in which many other jurisdictions operate. However the consultation also considered a ‘payment on account’ system although this could get complicated where there is no self assestment record.
Will double taxation apply?
Where there is a double taxation treaty between the UK and the taxpayer’s country of residence a tax credit will usually be available for the UK CGT paid. This means if the CGT rate in the country of residence is higher than in the UK, full credit will be available for the UK tax paid leaving the taxpayer no worse off.
What happens next?
The government will now consider the responses with a view to publishing draft legislation in the Autumn. Further consultation will then take place before the legislation is published in 2015.
Date: 3rd September, 2014
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