UK Capital Gains Tax for non-UK residents: The Secrets Unveiled

Since 6 April 2019, the UK's capital gains tax (CGT) regime for non-residents has undergone significant changes. The scope of CGT has been extended to include not just UK residential property but also UK commercial property and indirect disposals of UK real estate. These changes have broad implications for non-resident individuals, trustees, partnerships, and companies holding UK property assets.

Understanding these rules is crucial for ensuring tax compliance and optimising tax efficiency, but also to reduce capital gains taxes as far as possible.

The current landscape, particularly with the 30th October Budget soon to be delivered by Rachel Reeves that will most certainly give rise to CGT and Inheritance Tax charges, coupled with the fact that more and more individuals and families are exploring opportunities offshore for a 'better' life, fed up with the increase in taxes at every turn alongside diminishing public services, makes this article even more relevant!

Secret for you: being non-UK resident doesn't mean there is no UK tax to worry about!

In this guide, we will explore the key aspects of the UK CGT regime as it applies to non-residents, providing a detailed overview of direct and indirect disposals, rebasing rules, tax rates, and the specific implications for different types of property.

1. Overview of the Extended UK Capital Gains Tax Regime

Before 6 April 2019, the UK CGT regime for non-residents was limited to residential property. However, the extension introduced on this date now subjects non-residents to UK tax on gains arising from the disposal of UK commercial property as well. Additionally, indirect disposals of UK real estate, whether residential or commercial, are now within the scope of UK taxation.

For disposals made on or after 6 April 2019, non-resident individuals, trustees, and partnerships are chargeable to UK capital gains tax. Non-resident companies, on the other hand, are subject to UK corporation tax on these gains.

2. Direct Disposals of UK Real Estate

All non-residents, including individuals, trustees, partnerships, companies, widely held funds, collective investment schemes, and life assurance companies, are now subject to UK tax on a direct disposal of UK real estate. This marks a significant expansion from the pre-2019 regime.

Commercial Property

For non-residents disposing of UK commercial property, the property’s value is rebased to 5 April 2019. This means that only the gain arising from 6 April 2019 onwards is subject to tax. This rebasing provides an option to calculate the gain (or loss) using the original acquisition cost, which may be beneficial if the property is standing at a loss. However, it is important to note that there is no option to time apportion the gain into periods before and after 6 April 2019.

Recommendation: Non-residents holding UK commercial real estate should obtain a professional valuation as of April 2019. This valuation will serve as crucial evidence should HMRC query the valuations during a future disposal.

Tax Rates:

• Individuals: 10% or 20% (depending on income level)
• Trustees: 20%
• Companies: Corporation tax (currently 19%, though future changes should be monitored)

Residential Property

For residential property, the rebasing date remains 5 April 2015. The tax rates for individuals continue to be 18%, 24% or 28%, depending on income levels, with trustees being taxed at 24% or 28%. Non-resident companies will pay corporation tax on gains arising from the disposal of residential property.

The rebasing to 5 April 2019 is also applicable to persons brought within the charge to tax on residential property gains from 6 April 2019, such as non-resident widely-held companies.

ATED-CGT: With the introduction of these changes, the Annual Tax on Enveloped Dwellings (ATED) related to CGT has been abolished.

3. Offsetting Losses

Under the current regime, non-residents can offset losses realised on UK residential property against gains on UK commercial property, and vice versa. This flexibility allows for more strategic tax planning.

Group relief is also available for losses realized by a group company, provided the relevant conditions are met.

4. Indirect Disposals of UK Real Estate

An indirect disposal refers to the disposal of an interest in an entity that holds UK real estate, whether the property is commercial or residential. This includes the sale of shares in a company or holding company that owns UK real estate, an interest in a partnership, or an interest in settled property deriving its value from UK land. It also covers disposals of interests in UK funds, such as REITs and PAIFs.

For an indirect disposal to fall within the scope of UK tax:

1. The entity must be ‘property-rich’: At least 75% of the value of the company's qualifying assets must derive from interests in UK land. This 75% test is based on the market value of the company’s assets and is not reduced by liabilities.
2. The non-resident must hold a 25% or more interest: The non-resident must hold a 25% or more interest in the entity at the date of disposal, or have done so within the previous two years unless this was for an insignificant period.

Trading Exemption: The legislation includes a trading exemption that applies if all UK land interests are used in a qualifying trade, provided the trade has been carried on commercially for at least one year before the disposal and continues after the disposal. This exemption is particularly relevant to investors in the retail and hotel industries.

Rebasing to 5 April 2019: For indirect disposals, rebasing applies to the value of the interest in the entity, rather than the property itself. The gain is calculated based on the increase in the value of the interest in the real estate entity from April 2019.

Alternative Calculation: It is possible to elect to calculate the gain by referencing the original cost of the interest. However, if this calculation results in a loss, the loss is not allowable for tax purposes. As with direct disposals, there is no option to time apportion gains on indirect disposals. Therefore, valuations should be obtained as of April 2019.

5. Tax Treaties and Anti-Avoidance Measures

Some double tax treaties may override the UK's domestic taxing rights on disposals of UK property. While this is uncommon for direct disposals of UK real estate, it could apply in cases where a UK property is held in an overseas partnership, or shares of a UK property holding company are sold, and the treaty allocates taxing rights solely to the country of the shareholder’s residence.

Anti-Avoidance Provisions: To counteract treaty shopping - where a treaty is used to circumvent UK tax rules - the legislation includes anti-avoidance measures. These provisions allow HMRC to counteract tax advantages that are contrary to the purpose of the double taxation treaty.

Renegotiation of Treaties: The UK government has indicated that it may renegotiate certain treaties, such as the UK/Luxembourg treaty, to ensure that the UK’s taxing rights are preserved on disposals involving UK land.

6. Tax Returns and Payment Obligations

Non-Resident Individuals: Non-residents must file a tax return reporting the disposal and pay the tax due within 60 days of the disposal. A return is required even if there is no tax to pay. If the individual already files self-assessment returns, the CGT liability can be deferred until 31 January following the tax year of the disposal.

See Episode 3 from my talkin.TAX podcast to understand the rules surrounding the new capital gains tax returns that were introduced a few years ago.

Non-Resident Companies: Companies must register for corporation tax within three months of the disposal. Payment is due within the normal corporation tax deadlines, typically 9 months and 1 day after the end of the accounting period. If the gain exceeds ￡1.5 million, an earlier deadline of 3 months and 14 days applies.

Non-UK Company Becoming UK Resident: If a non-UK resident company becomes UK resident after 6 April 2019 and disposes of UK real estate, the value can be rebased to 5 April 2019 for commercial property or 5 April 2015 for residential property. However, any gain arising before the rebasing date may still be taxable on UK resident shareholders.

7. Next Steps for Non-Resident Investors

Given the complexities and frequent changes in the legislation surrounding UK real estate, it is imperative for non-resident investors to seek professional tax advice. At ASWATAX, we specialise in helping non-residents structure their investments in the most tax-efficient manner, taking into account their unique circumstances and objectives.

My frequent travels and periods of non-residency makes me even more proficient and well-positioned to provide relevant and proactive advice!

As this is something we look at on a day to day basis, we are well-versed to review ALL of your affairs and proactively advise you, bringing about significant value and financial benefit by way of tax savings.

Existing property structures should be reviewed to assess the impact of the new rules and identify any opportunities for tax savings.

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We'd be more than happy to help.