Malcolm Gunn draws attention to the new capital gains tax regime being introduced by the Government.
It has always been a principle of capital gains tax (CGT) that those not resident (or ordinarily resident) in the United Kingdom have no liability to tax on capital gains, except in relation to assets held for UK branches or agencies. An important change was made to this rule last year when ‘non-natural persons’ (mainly companies) who are caught by the annual tax on enveloped dwellings (ATED) charging regime were brought within the charge to CGT on the disposal of the relevant property, even though any such company may be non-resident.
As we now know, this was the thin end of the wedge and the charge on non-residents will be radically widened from April 2015. It has been announced that all non-residents disposing of UK residential property will have liability to CGT on ‘future gains’ arising from April 2015. No further details have been provided, but one assumes that the charge will apply to individuals, companies and other entities. However, some important planning issues arise with this announcement.
Residential property
In the case of individuals, the UK property will often be held as a UK home for use during visits to the United Kingdom. Although we can take it from the announcement that there will be rebasing for CGT purposes on the introduction of the new charge, this will not deal with all relevant matters by any means. A UK property is unlikely to be the main residence of a non-resident person on the facts and so a main residence election for the property would be appropriate.
But it is by no means clear that the period of ownership of the property will equally be rebased on the introduction of the charge. Equally, the property owner may be out of time to make a main residence election, given the two year statutory rule starting from the time of acquisition. Whether these points will be covered by the forthcoming legislation remains to be seen, but quite possibly the Government may not feel inclined to provide any further assistance to non-residents in reducing their tax liability.
To deal with these points, if in fact they do arise when the draft legislation is published, non-residents should consider fully resetting the CGT position in relation to such properties by transferring them to short term trust, which has reversion to the settlor within a given period, say one year. Such a trust normally avoids any inheritance tax liability. When the trust terminates it causes a fresh acquisition of the property, which is released from it. These trusts have always been useful for expats before they return to the UK and they may now be useful in a wider context.
Investment property
Different CGT issues arise with properties held as investments by non-residents and let commercially. Non-resident landlords will of course already be on record with HMRC in order to charge tax on the rents and so enforcing a CGT charge against individuals overseas will not be a problematic as one might suppose. Presumably the charge will not apply to the disposal of shares in an offshore company which holds the UK property, in which case the CGT charge on a let property would be avoided by selling the shares instead of the property.
The transfer of a property into a company incurs stamp duty land tax, but at present at least non-residents do not need to consider CGT on the transfer. However, finding a buyer for the shares might not be all that easy.
Internationally, there has been a trend in recent years to bring in CGT charges on domestic property disposals by those who are resident elsewhere and so it is not surprising that HMRC is going with the flow. However, it remains to be seen exactly how the charge will be structured to deal with any mitigation techniques.
Practical Tip:
Non-residents and tax practitioners should watch out for further developments regarding this important change to the CGT regime.
