The new era non-residents and UK residential property Emma Chamberlain Pump Court Tax Chambers 16 Bedford Row London WC1R 4EF echamberlain@pumptax.com Tel 0207 414 8080 October 2015 STEP
Overview A mess contradictory objectives Drive to discourage enveloping BUT failure to understand why people envelope EU constraints due to free movement of capital Further change forthcoming Only residential property targeted not commercial can this policy be justified? 2
Main changes affecting non-residents holding residential property Over the past three years the government has introduced: new taxes on high value residential property held by companies (whether UK or offshore): ATED and ATEDrelated capital gains tax; inheritance tax restrictions on excluded property where borrowing is secured on UK property; higher SDLT on high value residential properties; capital gains tax on all residential property held by nonresidents; A new inheritance tax charge from April 2017 on all residential property owned by excluded property trusts or foreign doms; BUT commercial property is largely unaffected! 3
Main changes affecting non-residents holding residential property We cover: Acquisition Retention including death Disposal The position on acquisition by NR of property worth nearly 5m 4
The purchase - stamp duty land tax (SDLT) SDLT is paid by the buyer on the purchase price. The rates of SDLT have been increasing anyway in recent years but from 4 December 2014 the actual and effective rates changed significantly. Broadly, for purchases NOT made through a company, the position is as follows: Before 4 December 2014 From 4 December 2014 Purchase price Rate % Charged on total purchase price 0 125,000 0 0 125,000 0 125,000 250,000 1 125,000 250,000 2 250,000 500,000 3 250,000 924,000 5 Purchase price Rate % Charged as part of purchase price within each band 500,000 1,000,000 4 925,000 1,500,000 10 1,000,000 2,000,000 5 > 1,500,000 12 > 2,000,000 7 5
The purchase - stamp duty land tax (SDLT) The method of calculating SDLT has also changed but only to residential properties. Previously, if the purchase price fell into a particular band (say between 1m and 2m) a single rate (5% in this case) applied to the whole purchase price. Now each part of the purchase price in a particular band is taxed at the relevant rate. The overall impact is that SDLT has increased for the purchase of properties in excess of 1.125m and the most expensive UK properties will now incur SDLT at an average rate very close to 12% - similar to 15% for enveloped properties 6
Purchase and companies - SDLT Since 21 March 2012, 15% SDLT has been charged on companies acquiring high value property. No banding. Schedule 4A FA 2003 From 20 March 2014 the threshold was lowered so that residential properties acquired for over 500,000 are caught. Where the 15% rate applies, it applies to the entire purchase price (i.e. it is not banded). Catches gifts of property to connected companies FA 2003 s53 transaction is deemed to take place at market value Where an ATED relief applies (eg where the property is rented out), the company may pay SDLT at the normal rates as long as the property qualifies for relief throughout the first three years of ownership. If it fails to qualify throughout the period, the difference between the punitive 15% and the SDLT actually paid is clawed back. HMRC may well request EVIDENCE of use 7
Retaining the property inheritance tax: new changes To avoid inheritance tax, non-resident foreign doms often hold UK property, especially let property, through corporate vehicles. This resites the property and means it is excluded property. Technical brief July 2015 announced a new inheritance tax charge from April 2017. If UK residential property is held through a foreign newco or partnership and would otherwise be excluded property because it is owned by a foreign dom individual or trust then for chargeable events after April 2017 inheritance tax will now be imposed. So on any outright gift of newco inheritance tax will be payable if individual dies within 7 years; gifts into or out of trust after April 2017 entry and exit charges payable. Watch reservation of benefit provisions where settlor is non-resident and foreign dom and benefits from a trust that holds UK residential property through a corporate vehicle. On deaths after April 2017 inheritance tax could be payable. Exclude settlor before 2017. Ten year charges will arise on trusts holding UK property through newcos. 8
Retaining the property inheritance tax Applies to all residential property of any value and whether or not let. Not quoted companies Aims to catch non-residents buying UK residential property through corporate vehicles. Many questions on new proposal remain unanswered. Art and commercial property owned in a foreign newco are unaffected and the technical brief makes it clear there are no proposals to extend inheritance tax more generally to UK property held in foreign companies which are excluded property FA 2017. Consultation document/draft legislation next year 9
Retaining the property - ATED ATED has applied since 1 April 2013 to high value properties held by companies, partnerships with a corporate partner and collective investment schemes. Residence of company is irrelevant and includes UK companies High value refers to properties over 2m but, from 1 April 2015, properties over 1m will be included and from 1 April 2016 properties over 500,000 will also be included. Exemption e.g. if property let out but reporting still required In addition, from 1 April 2015, the rates of ATED increased by 50%, as follows (s70 FA 2015): 10
Retaining the property - ATED Property value ATED 1 April 2014 31 March 1 April 2015 31 March 2016 2015 500,000 1,000,000 0 0 ( 3500 from 1 April 2016) 1,000,000 2,000,000 0 7,000 2,000,000 5,000,000 15,400 23,350 5,000,000 10,000,000 35,900 54,450 10,000,000 71,850 109,050 20,000,000 There are exemptions and reliefs from ATED. The reliefs > 20,000,000 143,750 218,200 11
Selling the property ATED-related CGT Since 6 April 2013, ATED-related CGT has applied on the disposal of high value properties by companies within ATED regime - only the increase in value after 5 April 2013 is subject to ATED-related CGT. Rate is 28%. No indexation Applies to companies resident in the UK and abroad. To the extent ATED reliefs such as letting relief apply then the gain on disposal will also be relieved from ATED-related capital gains tax FA 2015 - ATED-related CGT extended to property worth 1m for disposals from 6 April 2015 and to property worth 500K from April 2016 Takes priority over NR capital gains tax 12
Selling the property non-residents CGT Legislation found in FA 2015 Schedules 7 and 9. From 6 April 2015, CGT will potentially apply to all non-residents on the disposal of ANY residential property interest. i.e. a dwelling S14B(1) TCGA 1992. Includes gifts except to spouse Letting irrelevant so the scope of the tax is much wider than ATED. Where properties exposed to the NR CGT charge were held before 6 April 2015, they will be rebased (tax-free) to that date, thereby removing the earlier gains from the new charge. Taxpayers can opt to disapply rebasing but it is the default option. Rates will be: 18% or 28% for individuals (depending on total UK income and gains), no indexation. Possible PPR 28% for trustees (possible PPR) and PRs without indexation and 20% for companies (with indexation) no PPR. 13
What land does NR CGT apply to? Any building which is used or suitable for dwelling and any garden and grounds regardless of size, use, value or the status of the disponer Exclusions for institutions including schools, hospices, prisons, care homes and purpose built student accommodation managed or controlled by the university and with at least 15 bedrooms, occupied by students for 165+ days pa Dwelling which is temporarily unsuitable for use as a dwelling continues to be treated as a dwelling unless accidental or involuntary damage renders it unsuitable for use for at least 90 consecutive days. Dwelling ceases to exist if it is demolished to ground level Not a dwelling if it is undergoing works to convert it to something else authorised by planning permission which can be given retrospectively What if the property has been a non-residential dwelling for part of the period of ownership since April 2015 or the property is or has been mixed use, i.e. part residential and part not? In the case of mixed use a just and reasonable apportionment is required In the case of change of use - time apportionment 14
Who does NR CGT apply to individuals Any non-resident individual TCGA 1992 s14b Condition A Any resident individual if the disposal takes place in the overseas part of a split year Condition B Annual exemption applies Rates are normal capital gains tax rates 18% and 28% Availability of 18% rate depends on whether the individual has taxable UK source income. UK dividends and income are excluded in calculating that rate; UK rental income is included PPR available even for non-residents if appropriate election made 15
Who does NR CGT apply to partnerships and trusts Normal look through applies to partnerships TCGA 1992 s59 Trusts the charge applies to non-resident trusts Normal trust residence rules apply Rate is 28%. No indexation. Gain that is subject to NR capital gains tax is outside ss86 and 87. 16
Who does NR CGT apply to companies All NR companies are prima facie within the charge. Charge is capital gains tax but the rate of tax is corporation tax rates. 20% Imposing a higher rate on NR companies than UK companies would not be EU compliant Calculated as for corporation tax so indexation applies. ATED-related capital gains tax takes priority Inter group disposals ignored A company can claim exemption on disposal if diversely held (i.e. not close) or an OEIC or unit trust which meets the widely marketed condition or a life company Quoted companies are not excluded from the NRCGT if closely held TAAR applies 17
Property held on or after 6 April 2015 computing the gain Although the default method is to assume a deemed acquisition at market value on 6 April 2015 (Sch 4ZZB para 6) note that if NR individual or trust becomes UK resident prior to sale there is no rebasing although rebasing becomes available again if the individual becomes NR before disposal. Advice may be to rebase property before a NR arrives here! 18
HMRC FAQ s 18 March 2015 Q20 I bought a UK residential property in 2001 whilst I was living abroad. I moved to the UK in December 2015 and sold the property at a gain in March 2018. Can I rebase to 5 April 2015? A20 No. UK residents are unaffected by the changes and will be subject to CGT in the normal way i.e. chargeable on the full gain less any reliefs due along with the CG annual exemption. 19
Property held on 6 April 2015 computing the NR gain Property held on 5 April 2015 default rule likely to apply 3 computational methods (taxpayer s choice when he files the NR return): (a) Rebasing as at 5 April 2015 (automatic default); (b) No rebasing (use where the property has fallen in value); and (c) Straight line apportionment (useful where a property increases in value disproportionately after 5 April 2015) No relief from the charge for letting the property (c.f. ATED) Compliance cost: NRCGT form on disposal even if no tax (30 days!) NRCGT losses only against gains of the same type (unless UK res) For trusts, NRCGT paid by trustees reduces stockpiled gains pool April 2015 valuation obtained now or when filing? 20
PPR position from 6 April 2015 To qualify, an individual or his spouse now has to be resident in the territory where the house is or singly or together the individual/spouse must meet the day count test spend 90 midnights in that house or another house in the same territory Residence in the UK is determined by the Statutory Residence Test (SRT) Not a one-off test at sale. For every period post April 2015 that the new rules are not met PPR will be lost (subject to the final 18 months applying). Keep careful records. Changes only apply from 2015/16. In determining relief for periods prior to 6 April 2015, the new rules are ignored 21
Property held on 6 April 2015 PPR s222b TCGA NR can make a PPR election: no two year time limit and can be backdated indefinitely. Make election at the time of disposal in NRCGT return Right to make a PPR election cannot be restricted to UK or EU residents as this would be a restriction on free movement of capital Prior election when becoming UK resident can be cancelled unless another property elected has been disposed of If a person owns a house on arrival in the UK he cannot elect from scratch unless the two year clock can be started again eg. he acquires another residential property he occupies or a let property ceases to be let and he occupies it as a residence Keep careful records of occupation each year How do you prove the position? Last 18 months ownership applies if property has been main residence for any part of the period of ownership even before 2015. 22
Property held on 6 April 2015 PRR FAQs Q11 I lived in the property for 20 years before leaving the UK in 2010 and had met all the conditions for PRR up to that date. Does this mean if I sell the property by 5 October 2016 there will be no capital gains tax liability? Answer Yes. If you can identify a time period prior to 6 April 2015 that the property qualified for PRR then final period relief will be available i.e. the last 18 months of ownership will be eligible for relief 23
Administration of NRCGT NRCGT return must be filed within 30 days of completion on a form prescribed by HMRC TMA 1970 s12zb This is the case even if end of year tax return filed. Self-assessment: NRCGT return must be accompanied by an advance selfassessment. This is not required if the disponer has already been required by HMRC to deliver a tax return for the current or the prior tax year. S12ZG Advance self-assessment also not required if the disponer has delivered an ATED return If the NRCGT return is accompanied by a self-assessment, the capital gains tax is payable on filing TMA 1970 s59aa Otherwise payable by 31 January following the end of the tax year No burden on solicitors to deduct withholding tax from sale proceeds But note all non-residents must file a NRCGT return within 30 days whether or not within self-assessment and whether or not there is a gain. Intended to raise 70m by 2018/19. 24
Current and future position for companies SD / SDLT IHT IT 12% - 15% - still no SDLT on sale of shares 40% - no protection from Apr 2017 and new deductibility of debt rules (s.162a) 20% UK withholding if let / shadow director if occupy and UK res / reduce IT on rent by borrowing non-uk resident CGT Less s.13 TCGA risk if UK resident (EU), otherwise nil no tax on sale of shares ATED 218,200 per year + CPI ( 20m+ houses) N.B. applies to UK companies too. o/s company ATED-CGT 28% on gain since purchase or 1 April 2013 No tax on sale of shares NRCGT GAAR Privacy Succession 20% for gains after 5 April 2015 No tax on sale of shares n/a but consider debt Less but some however beneficial ownership register Law of domicile for shares foreign will UK residential 25
DISCLAIMER The ideas contained in these slides should not be relied on by any person in any particular case without taking further specific advice. No liability is accepted to anyone who acts or omits to act in reliance on the content of these slides. echamberlain:@pumptax.com 0207 414 8080 tel Pump Court Tax Chambers 26