How does Change in Non-resident Capital Gains Tax Rules affect non-resident UK commercial property owners?

Change in Non-resident Capital Gains Tax Rules for Sale of UK Residential Property

After April 2015, all non-UK residents must inform HMRC and pay Non-resident Capital Gains Tax (NRCGT) on any profits made on the sale of residential property in the UK. The rules are complex, however, particularly if the property is not the main residence of the owner, or if its use changes from residential to commercial, but the summary below looks at some of the main points.

Before 6 April 2015

Before 6 April 2015, landlords who sold rental properties and were non-resident for tax purposes were exempt from CGT in the UK so long as the seller had been non-resident for at least five years. From 6th April 2015, this exemption ceases and non-residents become liable for CGT, although not necessarily the full tax.

After 6 April 2015

The changes apply to sales (known as "disposals") of residential property from 6th April 2015. The "disposal" date is when the contract to sell the property is agreed (called the "exchange").

How does this change affect non-resident UK commercial property owners?

Commercial property For commercial property, the position has not changed. Non-UK residents are not taxed on gains from commercial property. Nor has the position changed where the non-resident is regarded as trading. Change of use If the use of the property changed while owned by the person selling it, the gain can be time-apportioned to reflect any time the property was not residential. If the property was mixed residential and non-residential use, the gain is apportioned. However, property that is in the process of being constructed or adapted for use as a residential dwelling now falls within NRCGT. So, if a property is being converted from commercial to residential use, an Annual Tax on Enveloped Dwellings (ATED)-CGT does not apply until the property is first subject to ATED, meaning on first occupation, or when the property receives its first Council Tax rating. The extended CGT legislation only applies to disposals of UK residential property. The existing capital gains rules continue to apply and as a non-resident there will be no liability to UK CGT on disposals of shares, subject to the usual temporary non-resident rules. Trading in property If the disposer is a non-resident company that is trading in property in the UK through a permanent establishment, the new CGT will not apply. Unlike the ATED regime, there is no relief for property rental businesses. Instead, as currently, any gains from disposals will be chargeable as part of the permanent establishment’s corporation tax profit (after deducting any available indexation allowance) at the rate of 20%.

Special rules for companies

Companies that are controlled by fiver or fewer people are within the extended charge to CGT (excluding interests held by institutional investors or diversely held companies). The CGT rate and allowances will be similar to Corporation Tax (20% and an indexation allowance). Groups of companies will also have special rules to allow them to offset gains and losses by group members, and file returns on a consolidated basis. Where UK residential property is sold by a diversely held company, a widely marketed fund or by a life assurance company as part of its assets that provide benefits to policyholders, these entities will be able to claim exemption from the capital gains tax charge. Other communal dwellings There are some exemptions to the new charge, including "purpose built student accommodation" (certain criteria apply), accommodation for school pupils, care homes, hospitals and prisons.

Who Needs to Pay CGT?

The rules have changed from April 2015 to make CGT fairer across the board. All UK residents are liable to pay tax on gains made on the sale of property, but now CGT may be payable on residential property sold by non-resident individuals and trustees, personal representatives of non-resident deceased persons, and certain non-resident companies (generally those controlled by five or fewer persons). Non-resident individuals will be subject to CGT at the same rate as UK individuals i.e. 18% or 28% depending on the level of their taxable UK income. They will be entitled to an Annual Exempt Amount (AEA) (£11,100 for the 2015/16 tax year) in the same way as UK residents. Main residence relief may be available where the individual and/or partner have lived in the property as their main residence at some point during the period of ownership and certain conditions are met. Non-resident trustees and personal representatives of non-resident deceased persons will be subject to CGT at a flat rate of 28%.

How is the gain calculated?

The gain is worked out proportionately: the time the property was owned before 6 April 2015 is not subject to NRCGT, but the period after 6 April 2015 will be subject to NRCGT. Non-residents pay CGT on the capital gain when they sell:

• A UK residential property that isn’t their main home;
• Their main home if they’ve let it out, used it for business, had long periods of absence, or if it’s very large;
• If they have an interest in either of the above;
• Properties in the process of construction or being adapted for use as a dwelling;
• "Off plan" properties.

What is a Taxable Gain?

CGT is payable when the total taxable gains are above the annual CGT allowance. CGT is only paid on the proportion of the overall gain that is for the period after 5 April 2015. The gain made is taxed, not the total amount of money received. There are ways to calculate gains made on property bought before 6 April 2015 known as rebasing. The default position is that the value of the residential property is "rebased" to its market value at 6 April 2015 in order to calculate the gain. For example: Jim bought a property in June 2010 for £220,000 and sold in June 2025 for £300,000. Jim made a gain of £80,000 and in total owned the property for 180 months, of which 122 come after 6 April 2015. The NRCGT is calculated by multiplying the taxable gain over the entire period of ownership by 122/180, or 67.77%. Either way, for a residential property bought before 6 April 2015, you must know what the property was worth as at 6 April 2015 to work out which calculation basis is most favourable to you. Alternatively, you may elect for the gain on the property to be time apportioned to the period after 5 April 2015, or may elect to be taxed on the gain made over the entire period of ownership. This election will allow for any diminutions in value prior to 6 April 2015 which might potentially reduce the taxable gain and it may be beneficial where the property is standing at an overall loss.

Change of Use

If a person inherits a property and sells it they are entitled to the AEA from death to the following 5 April and also for the next two tax years. The rate of tax is 28%. The AEA is available for disposals in the same tax year as the death or the following two tax years.

Reliefs

Is private residence relief (PRR) available?

Private Residence Relief If the property is the owner’s main home Private Residence Relief (PRR) may apply to all or part of the gain. If PRR is applicable on the entire property during part of the period of ownership, then the final 18 months of ownership are also automatically covered. For example, on the sale of a property between 6 April 2015 and 5 October 2016 there will be no CGT to pay, but the sale must still be reported to HMRC.

Qualifying for PRR as a non-UK resident

Non-UK residents only get PRR on a UK residential property if s/he or her/his spouse/civil partner were either living in the UK for that tax year, or stayed overnight at the property at least 90 times in the tax year (see the 90-day rule). If the property was owned for only part of the year, the 90 days are time apportioned in line with the time the person owned it. PRR is also available if the total number of days spent in any UK property in the relevant tax year meets the 90-day rule, but only one property can be nominated. If the 90-day rule is not met then it will be counted as if the owner was away from the property for that tax year. PRR is given to the extent a property is the owner’s only or main residence; you can only nominate one property as the main residence. From 6th April 2015, a non-resident can normally only obtain PRR on a UK residential property for a tax year for which a new occupancy test is met. For non-residents, any nomination for a UK residence to be regarded as their main residence for a given period from 6th April 2015 should be included in the NRCGT return.

Payment of the CGT charge

All disposals must be reported to HMRC irrespective of whether there is a tax liability. The same reporting process will apply regardless of whether there is a chargeable gain, a gain covered by the annual exempt amount, a gain covered by relief such as PRR or a loss. If there is more than one disposal, each disposal is to be reported within 30 days of conveyance of the property. Payment can be made at your normal end-of-year tax payment or it can be paid at the time of reporting. Reporting and payment will be made electronically. Amendments can be made within a year of 31st January following the end of the tax year when the disposal was made.

Making a loss

Losses on disposal of UK residential property will be ring-fenced for use against gains on such properties that arise to the same non-resident in the same tax year. Unused losses will be available to carry forward to later years. Where a person’s residence status later changes from non-resident to UK resident, any unused ring-fenced losses will be available to use as general losses against other chargeable gains. A UK resident who becomes non-resident will be able to carry forward unused UK residential property losses for use against future UK residential property gains.

Conclusion

These are complex rules with tax implications that must be carefully considered before you decide which way works best to suit your personal circumstances. Please contact your account manager to discuss further if you are likely to be affected by the new rules.

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