Tax

GUEST COMMENT: The Party's Over For Some Non-UK Holders Of British Property

Andrew Goldstone, Mishcon de Reya, Partner Head of Tax, 5 January 2015

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Andrew Goldstone, partner and head of tax at international law firm Mishcon de Reya talks about changes to capital gains tax treatment of non-UK residents owning UK property.

Andrew Goldstone, partner and head of tax at international law firm Mishcon de Reya talks about changes to capital gains tax treatment of non-UK residents owning UK property.  

The UK government's long-awaited final proposals for capital gains tax on non-UK residents owning UK residential property have now been published. The government believes that capital gains tax should apply to disposals of UK residential property by residents and non-residents alike. The government states that it is “rectifying the unfairness in the system that currently allows non-residents to escape UK capital gains tax on disposals of UK property that are or could be used as a dwelling house”.

The plans for the new capital gains tax charge were first announced in the 2013 Autumn Statement and a consultation document followed in March 2014. Mishcon de Reya, in common with a number of law firms, responded to the consultation document and took part in working groups with HM Treasury and HM Revenue & Customs through the early summer of 2014 to discuss the proposals. The changes will be enacted through the Finance Act 2015, a draft of which was released on 10 December 2014.

From April 2015, non-UK residents who own a house or flat in the UK will have to pay capital gains tax when they sell it. However, to avoid unlawful discrimination against foreign property owners, if the property has been their main residence they can still claim exemption from tax in the same way that UK residents can. And under the current rules, UK residents can choose which of their homes they want to be treated as their main residence for the purpose of the CGT exemption. So if their actual main residence is a house in the country and their second home is a far more valuable but only occasionally-used London flat, they can elect for the London flat to be their main residence. Think MPs and the so called "flipping scandal".

The problem faced by the government is that if the same choice is given to non-residents who own a holiday home here and other properties in their home country, they would simply elect for their UK property to be treated as their main residence. They would then get full tax exemption on the sale of the UK property whilst paying no UK tax on the sale of their actual main residence in their home country. As a result, the government would raise almost no revenue from its new tax on non-residents.

To deal with this, the government is also changing the rules on when the capital gains tax main residence exemption can be claimed. A new “90-day rule” has been included in the recently published Finance Bill. This says that a property owner can only claim the exemption for a property in a particular tax year if they are either resident in the country where the property is located or they spend 90 days in the property during the relevant tax year. But this condition is not without its problems.

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