Non-resident owners of UK residential property will be liable to capital gains tax in the UK.Nick Barnes, Head of Research
Capital Gains Tax (CGT)
HMRC has made a number of tax announcements recently which could have major implications for residential property owners. Whilst the scope of these announcements in some cases has a wider impact, this note focuses purely on the implications as they relate to residential property.
The Government consultation on the proposals to introduce a capital gains tax liability on non-resident owners of UK residential property closed in June and the Minutes from the working groups that were held during the consultation period were published on 31st July. Whilst the final rules and regulations have yet to appear (we are told they will be published in "early Autumn 2014") the Minutes do provide some clarity with regard to the likely tax position for collective investment vehicles.
What is the current situation?
Currently, non-resident owners of UK residential property are not liable to capital gains tax in the UK.
What are the proposed changes?
The Government has confirmed that, with effect from April 2015, non-resident owners of UK residential property will be liable to capital gains tax in the UK upon disposal of their properties. The Government has stated that pension funds and other diversely owned collective investment funds are not intended to be brought within the scope of the extension of CGT to non-residents.
However, there appear to be definitional issues regarding the different types of collective investment schemes which are unresolved and the proposed solution is to introduce a "close company" test to limit the scope of the extension of CGT. This could become a fairly complex exercise in trying to establish precise ownership of these structures, including a grey area regarding the treatment of large listed property companies. One encouraging signal which has emerged is that the Government wishes to encourage institutional investment in the residential sector, so it could be assumed (although by no means guaranteed) that the final regulations will err on the generous side rather than being overly restrictive.
Various other issues were discussed, including the definition of "residential property", notably whether student housing and disposals of undeveloped land, mixed-use buildings, buildings under construction and buildings being converted should be brought within the scope of the new tax. The other key issues of what reliefs should be available and whether properties should be re-based as at April 2015 with regard to assessing their CGT liability were also discussed but without conclusive outcome.
What are the potential implications for you?
In summary, this document has not taken us much further forward in terms of knowing what the final regulations will be. We hope that these will be published as soon as possible in order to give non-resident owners sufficient time to decide how they will react before the tax is introduced in April 2015.