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capital gains tax (cgt)  •  Personal tax  •  Property

Restrictions to capital gains tax reliefs come into effect – impacting overseas landlords

By Lesley Stalker on 14 April, 2015

Two important changes to the current capital gains tax (CGT) rules governing residential property came into effect on 6th April 2015. Both were announced in the 2014 Autumn Statement. This blog serves as a useful reminder of the changes and should trigger any necessary actions amongst those affected - especially overseas resident individuals who own a second property in the UK.

Change 1: Capital gains tax is now payable on ALL property sales

Anyone who is non-UK resident and owns residential property in the UK will be required to pay CGT on future capital gains when they dispose of that property. The rules apply with effect from 6th April 2015 and only to increases in the value of the property from that date. The rate of capital gains tax applying will be 18% if the gain falls within their basic rate band or 28% if it falls within their higher rate band. The rate for trustees will be 28%.

To date, non-UK residents have largely not had to pay CGT on gains arising on UK properties - this new legislation brings into charge capital gains arising from 6th April 2015 onwards only. On a property disposal, it will be possible to either calculate the gain based on the market value of the property in April 2015 or to time apportion the gain based on the period of ownership so that the period of ownership after 6th April 2015 only is chargeable. In order to retain maximum flexibility therefore, our advice is to obtain a valuation of UK property at April 2015.

 

Change 2: PPR rules have been further restricted

The amount of any chargeable gains arising will depend on whether reliefs such as the principal private residence (PPR) exemption and the lettings exemption can be applied. This leads us to additional changes which restrict the availability of the PPR exemption. These changes have an impact on anyone who is not UK resident but owns a UK property. They also have an impact on UK resident individuals who own second homes abroad.

  1. The first change has been in force since 6th April 2014 and it is that only the last 18 months of property ownership (it was previously 3 years) are exempt from CGT if the property has been an individual’s PPR or the individual has made a PPR election at some point;

There are other qualifying conditions to the current PPR rules which affect both UK resident individuals who own property abroad which they wish to elect as their PPR and to non-UK resident individuals who own property in the UK which they wish to elect as their PPR.

  1. From 6th April 2015, the right to claim PPR will only be available if the property concerned is located in a territory in which the individual is ‘tax resident’. If the property is located in a territory in which the individual is not tax resident they must satisfy a new ‘day count’ test in relation to the property. This test applies so that the individual, or their spouse, or legally registered partner must spend, between them, at least 90 days (i.e. be present at midnight) in the property in the UK tax year. Time spent in another property in the same territory can also be applied towards the 90 day count so that the total days in all properties in the territory are aggregated.

These new rules do not affect the historic position where an individual has previously been a UK tax resident and now lives overseas, but has kept their UK home. In this case it remains the position that they will be entitled to PPR relief for the years they lived in the property in the UK, and they will still be entitled to the exemption for the last 18 months of ownership. However, if they wish to claim any other periods of PPR exemption from 6th April 2015, they will be subject to the 90 day rule.

 

Relief remaining unchanged

The right to apply a lettings exemption where a property has been an individual’s PPR and has also been let, will remain. This relief is the lower of £40,000 per person, and an amount equal to the PPR exemption. Therefore it entitles a couple jointly owning such a property to claim a maximum additional relief of £80,000 in addition to the PPR exemption.

 

Annual Tax on Enveloped Dwellings (ATED) and increased SDLT continues to apply for company owned residential property

Where residential property is owned by a limited company, or by an LLP with a corporate partner, ATED continues to apply and has been extended with effect from 6th April 2015 to include properties having a value over £1m.

ATED was initially introduced in 2013 to target those owning high value properties within a corporate wrapper, and the value threshold at which the charge becomes effective has been dropping. It now applies to property valued at more than £1 million and by this time next year, it will include property valued at over £500,000.

An increased rate of Stamp Duty Land Tax (SDLT) also applies to properties owned in such a structure; as announced in the 2014 Autumn Statement the rate of SDLT is already 15% for residential properties purchased by a ‘corporate body’ and costing more than £500,000.

Our previous blog explains the implications of ATED and the annual charges applying.

Clearly, owners of property need to carefully consider the future tax implications of their residential property investments and take professional advice where necessary.

The changes outlined mean the issues of non UK residence and property ownership are more complicated than previously and it is necessary to carefully consider the implications and the reliefs available before taking any action.

When considering these issues the new statutory residence test should also be reviewed to ensure you are clear on your residence status. We have blogged about the changes to the statutory residency rules previously - see article.

In summary, if you think these changes apply to you our immediate advice is to obtain an accurate April 2015 valuation of your UK residential property, and to take advice before taking any further action in relation to the property. For more advice on property tax and tax planning, please contact Lesley Stalker by emailing las@rjp.co.uk.

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