Since 6 April 2015, a non-resident whether an individual or a company who disposes of UK residential property is subject to the non-resident capital gains tax regime. The rules apply to non-resident individuals and trustees, personal representatives of non-resident deceased persons and certain non-resident companies (generally those controlled by five or fewer people).
This blog is only going to be considering non-resident individuals who own UK residential property and legal advice must be sought if you are going to be disposing of UK residential property.
How is the gain calculated?
If the property was acquired after 5 April 2015, the normal rules will apply (taxable gain = sales proceeds less original cost). However, where the property was acquired before 6 April 2015, the capital gains tax charge only applies to the gain which can be related to the period from 6 April 2015 to the date of disposal. There are three methods of calculating that capital gain which are set out below
The default position (“rebasing”) is where it is the difference between the sale proceeds and the value at 5 April 2015 which is charged to capital gains tax. Under this method the cost of the property is “rebased” to the value as at 5 April 2015 to enable the gain to be calculated. This rebasing requires a valuation of the property to be made as at 5 April 2015 and reference will therefore probably have to be made to historic data of sales around that time, using properties as similar in size and location as possible. This could be done by looking at providers such as Zoopla and Rightmove, and/or by consulting a local estate agent with records of sales in the area at that time. If this basis is used for the calculation of the capital gain, it is important to keep the documentation to support the valuation used, in case HMRC queries it. The value can be “sense checked” against the index of movement in property values during the period from 5 April 2015 to date of sale.
The second method is “time apportionment”. Under this method the first step is to calculate the increase in value of the property since it was acquired by deducting the actual original cost of the property from the actual sale proceeds. This figure is then “time apportioned” between the periods of ownership before and after 5 April 2015 and it is only the apportioned gain arising after 5 April 2015 which is subject to capital gains tax. The likelihood of this method being better than the “rebasing” method will depend on the evenness of the increase in value of the property – if the rate of the rise in the price of the property has been greater after April 2015 than before, it is likely that the “time apportionment” basis will work out better (and vice versa). This method also has the benefit of certainty as there is no reference to a valuation which could be queried by HMRC. If this method is to be used, an election will need to be made to HMRC to override the default “rebasing” method.
The third method is the “retrospective” method. Under this option the calculation is the same as the first step of the “time apportionment” method – that is by deducting the original cost from the sale proceeds, but there is no apportionment of the result between the periods before and after 5 April 2015. It is initially hard to see why anyone would use this method – this is because it would only be worthwhile if there has been a decrease in value between acquisition before April 2015 and sale, an outcome which is clearly unlikely in today’s residential property market. If there is such a loss, an election has to be made for this basis to be used which would lead to a capital loss being claimed and that loss can be offset against other capital gains taxable on the individual concerned for the tax year of disposal or future years (but not carried back and used against previous years’ gains).
Once the tax position has been calculated then principal private residence relief and lettings relief may be available if the property was lived in at some point during the period of ownership.
A non-resident individual is entitled to the capital gains tax annual exemption and if there is a capital gain then it will be taxable at either 18% or 28% depending on the amount of taxable UK income.
Reporting the disposal to HM Revenue & Customs?
The disposal has to be reported to HM Revenue & Customs within thirty days following the date of completion. The notification is dealt with through the completion of a Non-Resident Capital Gains Tax Return. The disposal has to be reported even if there is no capital gains tax to pay or if a loss has been calculated.
If the Non-Resident Capital Gains Tax Return is submitted late then HM Revenue & Customs will charge a late filing penalty.
How is the capital gains tax liability settled?
If you are not in the self-assessment system then the capital gains tax liability has to be settled within 30 days following the date of completion.
If you are already in the self-assessment regime then currently the capital gains tax liability does not need to be paid until 31 January following the end of the UK tax year in which the property was sold. For determining the UK tax year in which the disposal took place it is the date of exchange which is the key date for capital gains tax purposes.
With effect from 6 April 2020, the option to delay payment of the capital gains tax liability by a non-resident individual is to be withdrawn. This is as a result of the changes being made to the capital gains tax regime for UK resident individuals who sell UK residential property (whether it is a second home or a residential investment property). From 6 April 2020, the payment of the capital gains tax liability for a non-resident individual who is already within the self-assessment system will need to be paid within thirty days following the date of completion.
Overseas Tax Advice
It is important that if you are considered as a resident in the other country you should seek local tax advice to determine whether you will need to report the disposal of the UK residential property to the tax authorities in the country where you are living as well.
What about future changes?
Even though this blog is about non-resident individuals who own UK residential property, with effect from 6 April 2019, the charge to UK tax on non-residents (for both individuals and companies) is being extended to the disposal of UK commercial property and indirect disposals of commercial property.
Based on the legislation, commercial property in the UK which is sold after 6 April 2019 will be subject to either corporation tax (for non-resident companies) or capital gains tax (for individuals). It will only be the gain which accrues from 6 April 2019 to the date of disposal which is chargeable. A valuation at 5 April 2019 will be required.
Briefly, an indirect disposal of commercial property is where a non-resident individual sells shares in a company which holds UK land as an investment. There are conditions to be met if an indirect disposal is to be subject to the non-resident capital gains tax regime.
For non-resident individuals who dispose of commercial property (whether indirect or direct) this has to be reported to HM Revenue & Customs within thirty days following the date of disposal.
For non-resident companies, the legislation seems to imply that on the disposal of UK residential or commercial property after 6 April 2019 a non-resident capital gains tax return will not need to be submitted to HM Revenue & Customs within 30 days following the date of disposal. The reporting of the disposal will be done through the completion of a corporation tax return in which the deadline for submitting and making payment is under the normal corporation tax self-assessment rules.
Author: Anthony Barron, Tax Manager, Plus Accounting
Any views or opinions represented in this blog are personal, belong solely to the blog owner and do not represent those of Plus Accounting. All content provided on this blog is for informational purposes only. The owner of this blog makes no representations as to the accuracy or completeness of any information on this site or found by following any link on this site.
First Published: 11 March 2019
Last Updated: 11 October 2021