A key attraction for foreign investors in UK residential property has been the combination of increased capital values and an attractive tax position for non-residents.
However, that could all be about to change.
At the end of November, the government and HMRC published their response to this year’s consultation on the extension of capital gains tax (CGT) to gains made by non-residents disposing of UK residential property.
Historically, CGT has not applied to non-residents in these circumstances.
However, now the CGT regime will be extended to apply to all non-residents, with effect from April 2015. If this is combined with increases in the annual tax on enveloped dwellings (ATED) and the inclusion of new bands, does it mean the shine is now coming off what was seen by many as an untouchable market?
The key feature of the CGT regime is that only those gains realised by non-residents on the disposal of residential property after April 2015 will be taxable. This rebasing is good news, but non-residents should obtain a professional valuation, for future evidence, on or before the imposition of CGT.
There is more good news: non-resident companies will be taxed at the rate of UK corporation tax, 20% as of April 2015, on the proviso that if the company is subject to ATED, the rate of tax will be the normal ATED CGT rate, currently 28%. Individuals will be taxed between 18% and 28%, depending on the gain.
Those reliefs available to a UK resident will also be available to non-residents, including private residence relief, but only if a non-resident, their spouse, or civil partner, resides at the property for at least 90 days in a tax year. However, a word of caution: unless that person can meet the ‘90-day rule’ then CGT will apply and — don’t forget — a non-resident exceeding 90 days in the UK may come within the new statutory residence test and, for the purposes of UK tax, become UK resident.
The extension to the CGT rules will have significant implications for non-residents who currently hold residential property in the UK and for those who plan to do so. This may lead to some existing investors considering whether residential property remains the most appropriate investment choice. Certainly, investors will need to consider carefully how their purchases should be structured in the future.
Elaine Dobson is a partner at Taylor Wessing