Print this article

UK Government Ends CGT Exemption On Non-Residents' Property; Wealth Industry Unfazed

Tom Burroughes

5 December 2013

Wealth managers and lawyers gave a broadly muted reaction today to the move by UK finance minister to end non-residents’ exemptions for capital gains tax on properties, taking effect from 2015. The measure is seen as a way to raise revenue and calm fears that markets such as London’s prime residential sector have become over-cooked.

Osborne, delivering his annual Autumn Statement policy proposals on tax and spending against a background of still-high UK budget deficits, announced the coalition Conservative/Liberal Democrat government will scrap the CGT relief.

The measure is one of those most likely to be of interest to advisors to wealthy individuals, although other measures around tax avoidance and exchange traded funds were also notable.

"As expected, today's budget hit non-residents but, in a sign of awareness that measures with immediate effect send the wrong message, the Chancellor has promised that capital gains tax won't apply to property sales by non-residents between now and 2015. After that, the game changes,” Sophie Dworetzsky and Chris Groves of Withers' tax team, said in a statement.

“This will be an interesting test of how much non-resident investors are in UK property for the long term, or whether we see a flurry of sales in the next 12 months. Equally, this gives a good window for alternative holding structures to be explored,” they said. .

Richard Mannion, national tax director at Smith & Williamson, the accountancy and investment management group, said: “Mr Osborne confirmed that CGT will be imposed on gains by non-residents who dispose of UK residential property but not until April 2015. It will be some time before we know the detail of the changes but this may be a problem for UK people who live abroad but keep a home here. However the delayed introduction will give time for many to sell free of CGT in the interim.”

Liam Bailey, head of Knight Frank Global Research, said of the CGT change: “Tax is not the primary driver for the majority of international buyers of residential property in London. We anticipate that the removal of the CGT exemption for non-resident purchasers will have only a marginal impact on demand and pricing.”

“It is important to note that the change to CGT rules brings the UK in line with other key investor markets, such as New York and Paris where equivalent taxes can approach 35 per cent to 50 per cent depending on the owner’s residency status,” Bailey continued.

“As we noted in our recent report on International Buyers in London, while non-resident purchasers account for 28 per cent of central London property purchases, their share of the wider Greater London market is far smaller at around 12 per cent of all new-build property purchases in Greater London at the current time,” he added.

Other changes

Osborne confirmed a previously announced move to clamp down on the tax treatment of partnerships. The changes will affect the allocation of profits and losses in "mixed" partnerships, including Limited Liability Partnerships, which include both individuals and non-individuals, normally companies.

Andrew Sneddon, head of tax at law firm Trowers & Hamlins, said: "This measure had been announced by the Government ahead of the Autumn Statement, so its introduction is not surprising. The partnership tax code is already complex and cumbersome and this measure will not be welcomed. It will be even more important from now on to plan ahead when deciding on business structures to ensure that people entering into genuine commercial arrangements are not inadvertently caught out by the changes."

The government is also to change the regime for disclosing tax avoidance schemes, called DOTAS. A new information disclosure and penalty regime will be introduced for what will be known as "high-risk promoters".  Clients of these promoters will also have certain obligations including identifying themselves to HM Revenue & Customs.

"These measures undoubtedly strengthen the Government's hand in its efforts to combat what it regards as unacceptable tax avoidance. Taken together with the General Anti-Abuse Rule (the GAAR) introduced earlier this year, the Government now has a formidable arsenal in its ongoing struggles with the tax avoidance industry,” Sneddon said.

ETFs and stamp duty

From April next year, stamp duty and stamp duty reserve tax will no longer apply to share purchases on exchange traded funds, which currently apply if an ETF is domiciled in the UK.

“This should ultimately increase consumer choice and support the growth in the use of ETFs by a wide range of investors from retail through to pension funds and insurance companies,” Mark Johnson, head of UK sales at iShares.

Matt Johnson, head of distribution EMEA at ETF Securities, said: “Whilst the news doesn’t have a particularly large impact on the ETP industry as so many products are domiciled outside the UK, it is excellent to see that right up to the top of the UK government the ETP industry is well understood. In a world where we are witnessing increased regulation as well as taxation of financial products, it is very encouraging to see a government recognising the importance of this industry to investors and taking steps to minimising the costs of ETPs." 

“ETPs globally have seen exceptional growth over the last few years to over $2.4 trillion and anything that can help accelerate the pace of European growth is welcomed. This move is likely to encourage more asset managers to have ETFs domiciled in the UK, in which case ETF Securities is in an interesting position to address this demand. Innovation is absolutely central to how we operate as we continue to bring transparent and robust products to market,” he added.