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Rumours of extending UK CGT on UK property to Non-Residents

There is an extraordinary anomaly when it comes to the taxation of capital gains on UK property. This is because foreign investors are not subject to Capital Gains Tax at all, while UK resident individuals are.

 
 

 

At first glance this seems unfair, and there have been recent articles in the press which suggest that George Osbourne is considering widening the scope of Capital Gains Tax so that it applies equally to non-residents.

However, is it really unfair?

Are UK resident individuals really paying Capital Gains Tax on their homes? The answer may be “no”, because UK residents can also avoid the tax by claiming Principle Private Residence Relief. UK residents with more than one property can nominate one as their principal residence within 2 years of acquiring a second property which provides a great tax planning tool to make some tax savings. MP’s have been shown to be very familiar with this concept as revealed during the expenses scandal.

At present foreign investors are not chargeable persons, however this means that they are not eligible to claim any reliefs, including principle Private Residence Relief.

If they become chargeable persons will this mean that Principle Private Residence relief will be available to them? We think it would be discriminatory and contrary to EU law if it was not. If it is available, and they have the same power to nominate their principle residence, would a change in rules actually lead to more tax being collected? We suspect not.

Impact on Offshore Structures

Historically, most foreign investors invested in UK property through offshore companies. This is because a company not resident in the UK is not a chargeable person and so not chargeable to UK Capital Gains Tax. In addition the asset in the taxpayer’s estate is the non UK situs company but not the UK property which saves UK inheritance tax.

These vehicles may already be subject to tax under two recent changes to UK tax law. These changes apply to high value residential property (deemed to be UK residential property worth more than £2 million) held by ‘non-natural persons’ (such as companies).  The two tax implications are a significant annual tax on enveloped dwellings, the ‘ATED’ charge, and the ATED related Capital Gains Tax at 28% for properties sold for more than £2 million.

If a further change in rules leads to offshore companies being subject to Capital Gains Tax this may mean that there is another reason to ‘de-envelope’ if personal ownership means that ATED and ATED related Capital Gains Tax are avoided and if Principle Private Residence relief is also extended this too could be claimed.

However, there is a risk with claiming Principle Private Residence relief.  In light of the new residency rules, any foreigner whose UK home was their only or main home would automatically become UK resident. This might mean that the future gains on the residence become exempt but at a cost of becoming tax resident in the UK. This might not necessarily lead to more tax if the remittance basis or treaty relief is available, but it would certainly lead to more complexity.

 

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