Do you need to think about Non-Resident CGT?
There has been a mini-revolution in recent years in the world of capital gains tax (‘CGT’) with the repudiation of the principle that only those resident in the UK are subject to CGT.
The first crack in the wall was the introduction of ATED-CGT in 2013. This only applied to companies, including non-resident ones, that in broad terms owned residential property worth in excess of a particular value and which did not fall within certain exceptions, the principal one being the “letting exemption”.
Non-resident capital gains tax (‘NRCGT’) followed in 2015 and, so, has been on the statute book for just over three years. It imposes a charge to CGT on all categories of non-resident taxpayer, be they companies, individuals or trustees, in relation to UK residential property.
NRCGT and ATED-CGT overlap and where they do the ATED-CGT rules take precedence (more on this later).
To date NRCGT has not had a significant substantive effect in prime central London due to its starting point in relation to properties acquired before 6 April 2015 but in time, assuming the market improves, it will have a greater impact.
So what are its key features?
Residential property acquired before 6 April 2015
Since NRCGT applies to all UK residential property whenever acquired the Government ameliorated its impact in relation to properties acquired by non-residents prior to 6 April 2015.
The default position is that when computing the capital gain subject to NRCGT the taxpayer is deemed to have acquired the property at its open market value at 5 April 2015. At present, for most prime central London properties using this base value will create a loss. So, to date it has rarely been necessary to consider one of the alternative bases of computing the gain.
However, taxpayers can if they so choose elect for the gain to be taxed on the retrospective basis, in which case the actual costs of acquisition and enhancement are used. This might be advantageous if the acquisition was shortly before 5 April 2015 and the costs were greater.
The other method taxpayers can elect for is “straight-line time apportionment” with the relevant proportion being attributed to the post-5 April 2015 period.
Principal private residence relief (‘PPR relief’)
If after applying the most favourable basis of computation individuals and trustees realise a capital gain which is subject to NRCGT they might seek to claim PPR relief.
During years in which the individual or, in the case of trustees, the occupying beneficiary is tax resident the entitlement to PPR relief is determined according to the usual rules.
But, for years in which the individual taxpayer or occupying beneficiary is tax resident outside the UK the position is more complex. Use of the property as a residence does not count towards PPR relief for a tax year which is a “non-qualifying tax year”.
In broad terms a “non-qualifying tax year” is a tax year in which the taxpayer/occupier is resident outside the UK and the taxpayer/occupier does not satisfy the “day count test”. In order to satisfy the day count test he/she must spend at least 90 days in the UK residential property itself or another UK “dwelling-house”.
In the case of taxpayers who are individuals spending such a period of time in the UK in order to qualify for PPR relief may be problematic since, depending on other factors, that might have the effect of upsetting their non-UK resident status and expose them to tax on other income and gains.
Facts and figures and inter-action with ATED-CGT
ATED-CGT can apply to gains with effect from 1 April 2013 if corporate owned property fell into the ATED (annual tax on enveloped dwellings) then because it was worth more than £2 million at that point. Corporate owned properties worth in excess of £1 million and £500,000 fell within the ATED regime on 1 April 2015 and 1 April 2016 respectively.
As mentioned, the ATED-CGT rules take precedence.
If a gain is subject to both species of tax the corporate owner cannot elect for computation on a “straight-line time apportionment” basis.
The tax rates differ:
- NRCGT is chargeable at the rate the taxpayer would pay tax if resident – currently 28% in the case of individuals or trustees and the applicable Corporation Tax rate for companies, currently 19%.
- ATED-CGT is chargeable at 28% in all cases. If there is an NRCGT gain individuals and trustees may offset annual CGT allowances. There are no allowances for ATED-CGT.
Returns and the payment of tax
An NRCGT return needs to be submitted within 30 days after completion of the sale or the disposal. This deadline is very tight and when instructed by a taxpayer on a sale or another transaction that will involve a CGT “disposal” we ask them in advance to collate as far as possible all the material that will be needed for the return. At present a key document is a 5 April 2015 valuation of the property. A return needs to be filed even if the computation demonstrates that the taxpayer has made a loss.
- ATED-CGT returns need to be filed by 31 January following the UK tax year in which the disposal took place.
If both species of tax could apply both types of return need to be filed with HMRC.Normally NRCGT is payable within the 30 day period mentioned above. But, if the taxpayer is completing a UK tax return there can be an election for the tax to be paid on the 31 January following that UK tax year.
- ATED-CGT is payable on the 31 January following that UK tax year.
Be careful about your tax residence
NRCGT, with its currently helpful re-basing to the 5 April 2015 open market value, only applies where the taxpayer is conclusively resident outside the UK for the year in which the gain is realised. If an individual realises such a gain during a period of less than five full years’ residence outside the UK and falls foul of the “temporary non-residence” rule he or she will instead pay mainstream CGT in the tax year of his or her return to the UK.
Points to think about
We recommend that clients think about the possible impact of the NRCGT rules in advance of any transaction and would be delighted to advise on the substantive position at that stage.
We also help clients to deal with their NRCGT and ATED-CGT compliance obligations within the applicable deadlines.