From 6 April 2019, there are three occasions when a non-UK resident individual may need to pay UK capital gains tax on their disposals.
When the individual carries on a trade, profession or vocation through a UK branch or agency and the asset disposed of was used, held or acquired for the purposes by the branch or agency.
When individual makes a direct disposal of UK land – either residential or commercial.
When the individual makes an indirect disposal of UK property by disposing of shares in a company which is UK property-rich and where they hold/have held a substantial interest.
The requirement on non-residents to pay CGT on assets used in a branch or agency has been around since the inception of the tax in 1965 and on residential UK property since April 2015. Finance Act 2019 (FA2019) introduces two significant changes from April 2019 by extending the current liability to UK CGT from residential to commercial property and introducing the entirely new concept of the indirect disposal.
FA2019’s extension to commercial property means that, from 6 April 2019, UK CGT is now due on all UK land disposals by a non-resident individual, both residential and commercial.
Whilst there are some similarities to the existing regime for residential property, there are some notable differences, particularly around the area of rebasing, as discussed below.
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Where the individual holds a significant interest. This means that they, together with certain related parties, have at some point during the two years prior to disposal, held an interest of 25% or more in the company.
If these two tests are met, and they can be very complex for group structures, then the actual gain that is then assessed is the gain on the shares that have been disposed of. There is no apportionment to reflect the fact that up to 25% of the company’s assets may not be UK property.
There is an exception from CGT where, although the company is property-rich, the vast majority of the UK property held is used in a trade. Where the conditions are met, this exception will be beneficial for non-resident owners of companies which hold retail or hotel businesses for example.
To prevent tax on gains arising prior to 6 April 2019, provision is made for shares acquired before 6 April 2019 to be rebased at that date.
When calculating the gain on disposal it is important to use the correct value for the base cost. For UK residential properties disposed of by non-residents, only gains from 6 April 2015 are taxable so there are rebasing provisions for property acquired before this date with the individual deemed have disposed of and required the asset at market value at that date. Those rebasing provisions can be found in Schedule 4AA of FA2019.
Similarly, for direct disposals of non-residential property (and all indirect disposals) only gains from 6 April 2019 are taxable. Property (or for indirect disposals, shares) acquired before that date should be rebased to the market value at as 5 April 2019.
For direct disposals of property which is entirely residential or entirely commercial, rebasing should be relatively straightforward. However, where the property being disposed of is a mix of residential and commercial it will first be necessary to apportion the property into residential and non-residential elements and then rebase each element accordingly.
Rebasing for both residential and commercial property is optional, and the individual can elect to use the actual cost on acquisition (or value at 31 March 1982 if acquired before this date) instead. This may be beneficial in some cases, for example if the property has fallen in value. It will be relevant to consider what impact Brexit has on property values and thus on rebasing decisions. If property values have dropped at 5 April 2019 due to uncertainty, then rebasing may be less attractive. If nothing else, the general uncertainty may well make establishing a market value at 5 April 2019 challenging.
Calculating the gain after 5 April 2015 on a time apportionment basis depending on how long the property has been owned – the time apportionment method.
When electing not to rebase a non-residential property acquired before 6 April 2019, the option of time apportionment is not available and only the retrospective basis is available.
For gains on residential property disposals the usual 18/28% rates apply, depending on the income tax position of the individual making the disposal.
For direct disposals of non-residential property and all indirect disposals (whether or not the company holds residential or commercial property) the rates of 10% or 20% will apply.
Make a payment on account of the tax calculated as due at the time of the report – also within 30 days of completion.
The requirement to make a payment on account is different from the pre-April 2019 practice for reporting residential disposals by non-residents. A non-resident reporting a residential property disposal on or before 5 April 2019 who is already in self-assessment can defer payment of any CGT until completion of their self-assessment return. For disposals from 6 April 2019, the individual must make a payment of the tax calculated as due at the time of the report within 30 days – whether or not they are within self-assessment.
Where an individual makes more than one disposal in the same tax year with the same completion date, then both disposals must be reported on the same return. Under the system prior to 5 April 2019, it was permissible to report the disposals together or separately.
A disposal to which the no-gain/no-loss provisions apply (for example, a transfer between spouses).
A grant of lease for no premium to an unconnected third party.
A disposal by a charity or a disposal of pension scheme investments.
At the time of writing, final guidance on the new rules from HMRC was not yet available, but draft guidance can be found in Appendix 14 of HMRC’s CGT manuals here. Care will be needed in this area as the new rules do not always follow exactly the rules that applied to residential disposals between 6 April 2015 and 5 April 2019, and the indirect disposal rules are complex.
The most crucial element however will be ensuring that non-resident clients, as well as any estate agents and conveyancing solicitors with whom you deal, are aware of the changes. This increases the chance that the tax adviser can make the necessary reports in time so that their client will avoid penalties. There has been a deal of controversy over penalties for non-residents unaware of the 2015 rules affecting residential properties and, now the scope of reporting has been increased, penalties are likely to remain an area of concern.
This month’s column from ATT was written by Helen Thornley, ATT Technical Officer.