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UK Budget 2015: property news for non-UK residents
28 APRIL 2015
Based in Singapore, Suzanne Johnston is an associate with Withers Khattarwong. She advises high-net worth individuals on wealth planning including tax and trust issues.
The UK Budget 2015 brought into law the much anticipated extension of capital gains tax ('CGT') to non UK residents disposing of UK residential property. This means that as of 5 April 2015 companies are subject to CGT at a rate of 20% and individuals and trustees at a rate of 28% on gains made on UK residential property. However, the capital value of any improvement works can be brought into account in calculating the gain.
The new charge to CGT on non-UK residents brings the UK into line with other European countries, which have been taxing gains made on real estate by overseas investors for years. The new legislation provides that CGT applies to gains made on not just personal use residential properties but also on rental or investment properties. Individuals, partners, companies and trusts are all within the scope of the new charge. However, importantly, the new CGT charge only applies to gains ‘arising’ from 5 April 2015.
Principal private residence relief which can exempt an individual’s main home from capital gains tax is still available to non-residents in certain circumstances, but the rules have been amended to make it harder for a non-resident individual to have a UK principal private residence. These amendments are in addition to the amendment, which came into effect on 6 April 2014, to reduce the final exemption period from 36 months to 18 months.
The 2015 changes came hot on the heels of those ushered in by the UK Budget 2014 namely: a 15% rate of stamp duty land tax (the tax payable by the purchaser on any purchase of UK real estate) for residential property valued at over £500,000 where the property is acquired by a ‘non natural person’ (a company, partnership with a corporate member or collective investment scheme) on or after 20 March 2014; and the extension of the annual tax on enveloped dwellings (‘ATED’) to properties valued at over £500,000.
The Chancellor set the scene for the new regime for the taxation of UK residential property in the 2012 Budget when he announced the introduction of measures designed to make people think twice about owning UK residential property by way of a company or, as the Government prefers to refer to this type of ownership, ‘corporate envelope’.
ATED came into effect from April 2013 and initially applied only where a ‘non-natural person’ owned residential property valued at over £2 m. The ATED charge is payable on an annual basis and for the period 1 April 2014 to 31 March 2015 the payment date is 30 April 2014. The tax due where the value of the property is more than £2m but not more than £5m is £15,400 rising to £143,750 where the value of the property is over £20m. Where ATED applies if the ‘non natural person’ sells the property capital gains tax will be payable at 28% on any post 6 April 2013 gain. There are certain reliefs available from ATED and the ATED related capital gains tax charge, most notably where the property is being commercially let or commercially developed.
The 2014 Budget announced two new ATED bands. The first of which was implemented on 1 April 2015 for properties valued at more than £1m but not more than £2m with an annual charge of £7,000; and from 1 April 2016 a further new band will come into effect for properties with a value greater than £500,000 but not more than £1m with an annual charge of £3,500. The ATED related capital gains tax charge applies to these new bands with effect from 6 April 2015 and 6 April 2016 respectively. The ATED reliefs apply to the new bands and therefore it is still possible for properties owned by way of a company to avoid the charge if they are let on a commercial basis.
It is, however, not all doom and gloom. The December 2014 SDLT changes can be good news depending on what you are buying. Previously SDLT was charged on a "slab" system. In other words, if you crossed a threshold, you paid tax at the applicable rate on the entire amount of the purchase price. As of December 2014, the system has been made progressive. In practice, this results in lower SDLT for properties purchased for circa £900,000 and less.
Last but not least, it is also worth bearing in mind that none of the the changes to the taxation of UK residential properties impact on the UK inheritance tax position. Holding UK residential property by way of a non-UK company still provides full inheritance tax protection to non-UK domiciled individuals. For those who hold UK property in their own name, inheritance tax only kicks in at £325,000 and so it may not be a concern for lower value properties in any case. For higher value properties, there are a range of planning options, including insurance and borrowing and the implementation of estate planning documents to obtain the 100% exemption from UK inheritance tax that applies on gifts between spouses.