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Global Market Insight 23 December 2013

Important changes to Capital Gains Tax for UK non-residents

Following on from the Autumn Statement, Nicholas Barnes, Head of Research for Chesterton Humberts comments on the important changes to CGT on UK Residential properties held by UK non-residents:

In his Autumn Statement delivered on 5th December, the Chancellor announced that with effect from April 2015 Capital Gains Tax (CGT) will be levied on gains made by non-residents on the sale of UK residential property. The rationale behind the Chancellor's thinking is that those with the most in society should make a "fair contribution".

The good news is that the tax will not be retrospectively applied and that future gains will be rebased – probably from the value as at April 2015, although this has yet to be confirmed. No further information has yet been made available on either the scope or the rates (the top rate is currently 28%) of the proposed extension of the tax. However, a consultation document is due to be published in early 2014 which will provide a clearer indication of the details and an opportunity to perhaps mitigate some of the less palatable elements. It is worth bearing in mind that this move will bring the UK into line with many other developed countries who also tax non-residents on capital gains on residential property.

What is the likely impact of this measure? A possible outcome is that this will trigger a wave of sales before the extended tax is implemented. However, I believe that this is unlikely as the tax will not be retrospectively applied thereby removing the threat of an immediate and substantial tax bill for long term non-resident holders of UK residential property.

Another scenario is that the tax may push non-residents towards enveloping their properties. For example, property trading, rental and development businesses whose residential acquisitions are enveloped are currently exempt from CGT (as well as ATED and the higher rate of SDLT on acquisition). Equally, properties with a value of less than £2m can be placed within a wrapper and also be exempt from CGT, ATED and the 15% SDLT rate, which may trigger further enveloping activity.

There is a school of thought which suggests that this will be viewed by overseas purchasers as yet another example of the UK becoming less attractive and lead to questioning whether further measures will be introduced. Again, I doubt this will deter foreign purchasers to any significant degree. For one thing, it is bringing the UK into line with many other developed economies with regard to property taxation. Secondly, the UK's other attractions remain undiminished – safe haven, transparent and fungible property market with strong growth track record etc.

Nonetheless, as is frequently the case, the Government has managed to create considerable uncertainty with regard to future tax planning. For example, what if any reliefs will be available? Will the tax apply only to investment properties and holiday homes or will it also affect principle residences, in which case will expatriates Britons become liable? Will it apply to non-resident trusts? Will any value thresholds be imposed, for example as is currently the case for enveloped properties valued at more than £2m.

Such thoughts are pure conjecture at this point in time and we would advise waiting until the consultation document is published before considering taking any action, especially as the wider tax picture may well need to be factored in.

An individual's UK tax liability depends on where they are 'resident' and 'domiciled' in a tax year. Since 6 April 2013, the rules that determine if someone is resident in the UK for tax purposes have been put on a statutory basis known as the Statutory Residence Test (SRT).

It is important to understand what is meant by 'resident in the UK'. There is no special definition of the word 'residence' for tax. It is not just about whether an individual has a property in the UK or about how much time they spend there, but the more connections they have with the UK, the more likely they are to be deemed a 'UK resident'. One can be resident in more than one country at the same time.

There is no minimum length of time that will qualify an individual as a UK resident – but if they are in the UK for 183 days or more in a tax year, they will be resident in the UK for that tax year. Generally, the more time that an individual spends in the UK, the more likely they are to be UK resident.

However, the number of days someone is in the UK is only one of the things that affect whether or not they are seen as a UK resident. Even if they're in the UK for fewer than 183 days in a tax year, they might still be UK resident. If they come to the UK to live or work on a continuing basis, they will be resident from the point of their arrival. Other factors that affect residence status include:

  • whether the individual has previously been a UK resident
  • where the individual's family, property, business, work, and social connections are
  • the pattern and purpose of the individual's visits to the UK

An individual is likely to be considered a resident if, over a period of several years, their presence in the UK becomes part of the regular pattern of their life.