CGT ON HOMES – NOW A WORLDWIDE PROBLEM
Until now non-UK tax residents owning property in the UK, have enjoyed fantastic capital returns pretty much free of UK taxes. However the rules have just changed and those same people now have to report and in some cases pay UK capital gains tax on such gains – all within a tight time frame.
There is change for UK tax residents too. CGT main residence relief for overseas homes is now much more complicated, and won’t always apply in the way that you might have hoped.
The new rules for non-residents
Those who are tax resident outside the UK will now be liable to pay UK capital gains tax (CGT) on a disposal of residential property in the UK. Disposals include sales and gifts and residential property includes property bought off-plan or that you’re adapting for residential use.
You will only have to pay tax on the increase in value from 6 April 2015, and there is some flexibility in the way you can calculate this to best suit your circumstances and the information you have available to you. The rate of tax depends on the size of the gain and any income you have earned in the UK in the year of the disposal. Most likely it will be 28% but there is a lower 18% rate which might apply to some or indeed all of the gain if the gain is modest. You will have an allowance – £11,100 for 2015/16 – and will be able reduce the gain with any capital losses you may have incurred in the UK prior to or during the tax year of the disposal.
If your home country also taxes your UK gains, there will often be double taxation relief in some form or another. So it may be that there is no more tax to pay, just a lot more paperwork to complete…
Reporting for non-residents
The reporting of disposals for non-residents is strict: every non-resident not already completing a UK tax return must notify HMRC and pay their tax within 30 days of the disposal. Those who complete a UK tax return must notify HMRC within the same 30 days but can pay the tax on the usual due date (31st January following the end of the tax year of the disposal) having reported the disposal in the usual way in your tax return.
If you have no or limited prior dealings with HMRC, you will not have a lot of time!
What about principal private residence relief?
There is some good news. The generous principal private residence (PPR) relief can often apply to exempt some or all of your gain. No tax is paid if the gain is on a property which is (or has been) your main residence (and if you have more than one residence, you can elect which property to relieve). If the property has been your main residence for only part of your period of ownership only a proportionate part of the gain will be exempt.
The relief is available to anyone who is tax resident in the UK or who has spent at least 90 midnights in the property in question in the relevant tax year (or if you have more than one property, across all of your properties in that country).
Occupation by your spouse or civil partner will be treated as occupation by you for the purposes of the 90 midnight rule. This could be helpful.
If you are non-resident and you think you may need to spend time in the UK in order to qualify for PPR, you will need to be careful that you do not unintentionally become UK tax resident; under the statutory residence test this is also measured by reference to days spent here.
This is where the new rules will also affect UK residents with homes abroad. To claim PPR relief on your main residence abroad you must meet the same new conditions.
What should you do if you are affected?
- Consider obtaining valuations of your home as at 6 April 2015. You can wait until you make a disposal but having a contemporaneous valuation will be much less open to challenge by HMRC in the future. As a minimum, record the overall condition and any unusual features.
- Collect and keep records of all capital expenditure as these can be taken into account in calculating the acquisition cost for CGT.
- Keep a record of all the time you and your spouse/civil partner spend in the UK – mindful of the statutory residence test.
- If you have made a PPR election in the past, think about whether this will still meet the new rules relating to minimum time spent in the property. If you are considering making gifts of property and you or the recipient of your gift is not UK resident, it is even more important now to take advice before doing so; remember, a gift is a disposal for CGT purposes.
Our homes can be our most valuable and rapidly appreciating assets. It is therefore not surprising that their taxation is a sensitive matter. The message for anyone who is affected by these changes to CGT is to be aware of their implications and, if you are in any doubt, seek advice.