The proposed extension of Capital Gains Tax to UK property held by non-UK residents raises more questions than answers as the Consultation gets under way.
The announcement in the Chancellor’s Autumn Statement of 2013 that Capital Gains Tax (‘CGT’) would be extended to apply to UK residential property held by non-UK resident individuals received considerable press attention, not least because this represented a fundamental change to the long held principle that CGT is only levied on UK resident tax payers.
The proposed change shows the continued determination of Her Majesty’s Revenue & Customs (‘HMRC’) to raise more revenue from the UK (and specifically, the London) property boom and in particular from overseas property investors, following the introduction last year of the Annual Tax on Enveloped Dwelling (‘ATED’) charges and the increased Stamp Duty Land Tax (‘SDLT’) charge on UK residential property owned through offshore structures.
The new extension of CGT seems at first sight to be relatively straightforward. However, more detailed consideration is beginning to reveal some of the complexity that will be involved and much of this is coming to light following the publication of HMRC’s Consultation Document on 28 March 2014.
For example, the document identifies a potential discrepancy over the CGT profile of UK residential property which is being let out to 3rd parties. These properties are exempt from the new ATED charges and increased SDLT charges, but the proposal is that they would be subject to this new CGT charge on non-resident individual owners. HMRC’s proposal to rectify this discrepancy will be potentially to introduce a further CGT charge on properties let out but which are owned by offshore corporate structures, but this clearly will need further review.
Of potentially much greater impact, however, is the interaction of the proposed new rules with private residence relief, (‘PRR’). The Revenue are all too aware that if the new rule is simply imposed alongside the current arrangements for PRR, then most non-resident owners of UK property could simply elect for that property to be their principal residence and therefore avoid the CGT charge altogether. In an effort to close this loophole before it is opened, the Revenue are seeking to impose some wide ranging changes to the PRR rules (and for example these might involve doing away with the option of making an election for PRR altogether or imposing some sort of statutory residence test to determine automatically whether a property can qualify for the relief). Precisely how these points will be worked out remains to be seen and the responses to the consultation (which closes on 21 June 2014) will be of particular interest here.
Nevertheless, the impact of the proposed changes on PRR should not be underestimated. Following hot on the heels of the recent reduction of the final period of ownership (from 36 months to 18 months) under which two properties can both qualify for PRR, these new rules could well herald an entirely different PRR regime altogether, and this could have far reaching implications for UK resident taxpayers as well as non-residents.
We will be providing a further update on the latest developments once the responses to the consultation have been published.
In the meantime, however, non-UK resident owners of UK residential property would be well advised to review the position carefully well in advance of the proposed introduction of the new rules from April 2015.
If you would like any further information on these issues please contact one of the Edwin Coe Private Client team.
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