Historically, non-residents, whether they be individuals, companies or trusts, have not been liable to CGT on gains on residential properties. However, in April 2013 the Annual Tax on Enveloped Dwellings (ATED) was introduced, and with it ATED-related CGT charges. These apply where a dwelling (worth more than the threshold amount) is owned through a non-natural person, typically a corporate.
The consultation proposed extending the scope of CGT on UK residential property to all non-residents, which would therefore bring individuals, partnerships and trusts into scope. Unlike ATED, the proposal was for CGT to apply to UK dwellings of any value, but only gains arising after the proposed start date of April 2015 would be chargeable.
Exemptions were proposed for communal dwellings such as student accommodation. Neither will the charge apply where the property is owned through pension funds or diversely owned collective investment funds: the intention is to tax vehicles that provide individuals with ownership of their UK-residential property, whether occupied personally or kept as investments, including let property. The rate of tax would be 28%, except for corporate owners where a ‘tailored charge’ was mentioned. This charge would also be in addition to any ATED-related CGT, meaning that the interaction between the two charges could be complex.
The consultation document raised questions about the principal private residence (PPR) relief (also referred to as private residence relief- PRR). This is the exemption which currently exempts home owners from suffering CGT on the sale of their main residence. Where an individual has more than one residence, it is currently possible to elect which is to be treated as the PPR. If the PPR exemption were to be extended to non-resident owners, the Government feared that would simply allow non-residents to avoid the new CGT charge by nominating their UK residence as their PPR. To avoid this, the proposal made was to remove the PPR election from both non-resident and UK-resident homeowners and to determine which residence is the main residence either on the basis of the facts, or where the taxpayer spent most days in any given tax year.
Although HMRC will not publish a formal response to the consultation document until the Autumn, they have nevertheless published details of their meetings with various working groups on the GOV.UK site.
The government has reiterated its belief that the tax treatment of UK and non-UK residents should be aligned in respect of gains on UK property, although this needs to be balanced against other objectives, including that any regime should be simple and sustainable.
‘Close company’ test
As the government wants to encourage institutional investment into housing, and in view of concerns about the application of the charge to diversely held companies, a form of ‘close company’ test will apply to limit the scope of the charge. Companies controlled by a small number of private investors will be within scope, whereas the charge will not apply where UK residential property is disposed of by a diversely held institutional investor. By analogy, some large and publicly listed companies are similar to funds and may also be exempted. As many institutional investors use partnerships as part of their investment structures, options are being considered for how the ultimate investors in such structures will be identified in order to remove them from the charge.
Principal private residence relief
The overall feeling was that PPR relief should be retained, albeit in restricted form. So, for example, a minimum occupation threshold could be introduced below which an election for PPR cannot be made. The way in which such a threshold might operate is open for debate; it may include tests on both the length of occupation and on the ‘quality’ of the occupation.
Collection of the tax
One of the practical difficulties will be collection of the tax due, given that the vendors are non-resident. Whilst the Government’s stated preference is for a withholding tax, to be paid within 30 days of completion of a sale, consideration is moving towards offering a ‘payment on account’ system for taxpayers who are not within self-assessment. This is instead of the tax being withheld by another party, such as a solicitor, which was the previous proposal. This might involve a payment on account based on an initial assessment of the gain. Whilst there was support for this option, as opposed to withholding, the Government expresses grave doubts about the likelihood of all the tax due being collected in the absence of a withholding tax as the default position.
The government is also considering feedback that ATED-related CGT should be withdrawn to avoid a proliferation of CGT regimes, and that it should be possible for non-residents to rebase by valuing their property at April 2015 (although the alternative of time apportionment might be simpler).
A full response to the consultation document is promised in early autumn.