From April 6th this year (2015), individuals who do not spend sufficient time in the UK, or have insufficient ties with the UK to be resident there for tax purposes, but who nonetheless own a home in the UK, may now need to pay capital gains tax (CGT) on any gains arising on the eventual sale of the property.
How will the tax work?
Only gains made from 6th April 2015 are taxable in calculating the gain on the property disposal i.e. non-UK resident property owners will substitute the value of the property as at 6th April 2015 for its actual acquisition cost, thereby rebasing the value to its market value as at that date. Alternatively, property owners may elect to calculate the gain by using the actual acquisition cost but paying tax only on the time-apportioned post-5th April 2015 part of the gain.
If the non-resident usually files a UK self assessment tax return any gain must be included in the appropriate year's return, otherwise any tax must be paid within 30 days of completion. Non-residents will continue to be exempt from CGT on disposals of commercial property and other assets.
UK’s HM Revenue & Customs (“HMRC”) have issued brief general guidance.
Depending on the type of property, it may be sufficient to obtain more than one valuation from local estate agents. However, we recommend that the valuation as at 6th April 2015 be obtained from a professional surveyor.
A professional valuation from a Chartered Surveyor should ideally be obtained on or near to 6th April 2015 as this will provide the best evidence of the property’s market value at that time. Alternatively, an “historic” 6th April 2015 valuation could be obtained at the time of a future sale but this may be less secure as HMRC might well challenge any valuation which they consider to be unrealistic.
The Tax rates
For individuals the rate of tax on any gains made will be 18% or 28% depending on the individual’s UK income and the amount of any gain on disposal of the property. Non-resident individuals will be entitled to the same annual exemption as UK residents i.e. £11,100 in 2015/16. Assuming the non-UK resident has no taxable UK income, then gains in excess of approximately £50,000 on disposal of UK residential property in a tax year will fall within the 28% CGT charge.
Who is affected by the new charge?
The new regime affects non-UK resident individuals, trustees, closely-held companies and partners in partnerships disposing of a UK residential property interest.
To avoid discouraging institutional investment in UK residential property, the legislation will not extended the charge to companies, which are used as the private investment vehicle of individuals, families or small groups of investors. The definition of a “residential property interest” is wide and includes property of any value, which is suitable for use as a dwelling (or is being constructed or adapted for use as a dwelling). The charge will also be triggered by the assignment of rights to acquire a UK residential property, such as the sale of a purchase contract for a property in a new development. Thus, so-called “flipping” of contracts by non-UK residents will be potentially taxable.
Principal Private Resident relief
In reality most of us do not pay any tax when we sell our homes because of a relief (known as principal private residence relief or "PPR") that exempts any gains arising from CGT. There are limits and exceptions for instance where the property is let out or unoccupied for limited periods or the grounds are very large. Where someone owns more than one home, whether in the UK or abroad, they can nominate which of these qualifies for PPR.
Therefore, PPR from CGT will be available to non-resident individuals (and non-resident trustees where a beneficiary meets the qualifying conditions for an individual) but only for tax years in which the individual or their spouse have spent at least 90 midnights in the property.
Reporting and paying the tax
Individuals and companies will need to report relevant disposals to the UK’s HM Revenue and Customs within 30 days (regardless of whether a gain has been realised). Where there is an existing relationship with HMRC they may pay the tax due as part of their self-assessment return, otherwise payment must be made within 30 days of the disposal.
A return to HMRC will usually be required even in cases where there is no chargeable gain, for example, because the gain is within the CGT annual exempt amount.
FOR PORTUGAL TAX RESIDENTS, don’t forget that we are liable for tax on our worldwide income and gains so normally; the gain will be calculated by the sale price less the purchase price and any identifiable improvement costs. Any tax paid in the UK will normally be credited against any Portugal tax due under the tax treaty arrangements.
Phil Stephens is an International Financial Adviser at Blacktower Financial Management (International) Ltd with offices in Quinta do Lago and Cascais.
T: 289 355 685