New U.K. capital gains tax rules for non-residents

In his Autumn Statement 2013 the British Chancellor announced a fundamental change to the taxation of non-U.K. residents who invest in U.K. property. He stated that “Britain welcomes investment from overseas but it’s not right that those who live here have to pay CGT but those who are non-residents do not.” 

The proposal is that “from April 2015 non-U.K. residents will have to pay CGT on property in Britain, including selling of that property.”
There will be a consultation paper released in early 2014. Here are our speculative predictions as to what may happen (with the obvious caveat that we will not know the actual outcome for some time):

  1. No CGT as now – unlikely.
  2. CGT on properties with a value in excess of a certain amount – quite possibly £2 million – on (a) all gains which arise from the value at April 2015 or its later acquisition date – likely, as it ties in with CGT on companies introduced in 2013 or (b) all gains from the date of acquisition of the property even if before April 2015 – unlikely.
  3. CGT on properties applicable to the same extent as on individuals if the property is held through offshore trusts – likely (to remove an obvious loophole).
  4. An annual tax on high value properties – as for companies who pay the so-called “Annual Tax on Enveloped Dwellings” (ATED) on properties over £2 million – a form of long-mooted wealth or “mansion” tax on property – possible.
  5. Increased Stamp Duty Land Tax (SDLT) on higher value properties bought by individuals or through trusts – possible.
  6. Further tightening of how debts secured on U.K. real property can be used to reduce Inheritance Tax (IHT) – possible.

“Principal private residence relief” remains available as a, sometimes complete, relief against any CGT liability if the property has been used as the principal residence for part or all of the ownership period. Even if the property is not the principal residence it is possible to elect which of one, or more, residences (in or out of the U.K.) can qualify for this relief, but care is needed to adhere to the relevant time limits.

The “final period exemption” is still available, whereby the final period of ownership of a property used as a main residence at some point during the total period of ownership is exempt from CGT. However the actual period of this exemption is to be reduced from 36 months to 18 months from April 2014. Double tax treaty relief may also be available in individual cases to reduce any CGT exposure.

What planning steps should be taken?

In most cases, it is worth waiting to see what the consultation document says, and even then it would still be prudent to await the enactment of the final legislation, which should be by April 2015. However, if a sale of a property is already being considered then there may be no harm in doing that ahead of the consultation and final legislation, as this may prompt a flurry of sales thereafter, which could adversely affect sale prices.

A couple of points on related topics are worth mentioning. First, it is important to remember that, as of April 6, 2013, the United Kingdom now applies a statutory residence test which is used conclusively to determine residence status. There are a surprising number of wrinkles though, and some big traps to avoid, so care is needed. Secondly, offshore companies may also still be used to hold U.K. properties without a CGT charge, provided the value of the property remains under £2 million (although there is a risk that this value could be reduced in the future) unless one of the exemptions apply.

Such companies continue to be very tax efficient from a U.K. perspective, if the shareholder is not U.K.-domiciled.

As individual circumstances vary widely, it is important to take specific advice on the way to acquire, hold and sell U.K. property. The above is intended as a broad guide only.