UK Capital Gains Tax for Non-Residents: The Secrets Unveiled

Since 6 April 2019, the UK's capital gains tax (CGT) regime for non-residents has undergone significant changes. The government has extended the scope of CGT to include not just UK residential property but also UK commercial property and indirect disposals of UK real estate.

These changes have broad implications for non-resident individuals, trustees, partnerships, and companies holding UK property assets.

Understanding these rules is crucial for ensuring tax compliance and optimising tax efficiency, but also to reduce capital gains taxes as far as possible!

This blog explores key UK CGT rules for non-residents, covering disposals, rebasing, tax rates, and property implications.

- [Summary Table: Below is a table summarizing the tax position for disposals of UK real estate on or after 6 April 2019 by non-residents.](https://aswatax.co.uk/uk-capital-gains-tax-for-non-residents/#Summary_Table_Below_is_a_table_summarizing_the_tax_position_for_disposals_of_UK_real_estate_on_or_after_6_April_2019_by_non-residents)

1. Overview of the Extended UK Capital Gains Tax Regime

Before 6 April 2019, the UK applied the CGT regime for non-residents only to residential property. From this date, non-residents must pay UK tax on gains from disposing of UK commercial property. Additionally, indirect disposals of UK real estate, whether residential or commercial, are now within the scope of UK taxation.

From 6 April 2019, non-resident individuals, trustees, and partnerships must pay UK capital gains tax on disposals. Non-resident companies, on the other hand, are subject to UK corporation tax on these gains.

2. Direct Disposals of UK Real Estate

All non-residents, including entities and individuals, are now taxed on direct disposals of UK real estate. This marks a significant expansion from the pre-2019 regime.

Commercial Property

Non-residents who dispose of UK commercial property must rebase the property’s value to 5 April 2019. This means that only the gain arising from 6 April 2019 onwards is subject to tax. This rebasing provides an option to calculate the gain (or loss) using the original acquisition cost, which may be beneficial if the property is standing at a loss. However, it is important to note that there is no option to time apportion the gain into periods before and after 6 April 2019.

Recommendation: Non-residents holding UK commercial real estate should obtain a professional valuation as of April 2019. This valuation will serve as crucial evidence should HMRC query the valuations during a future disposal.

Tax Rates:

• Individuals: 18% or 24% (depending on income level)
• Trustees: 24%
• Companies: Corporation tax at 19% to 25%, depending on profits (25% main rate since April 2023)

Residential Property

For residential property, the rebasing date remains 5 April 2015. Individuals pay tax at 18% or 24%, depending on income levels, and trustees pay tax at 24%. Non-resident companies will pay corporation tax on gains arising from the disposal of residential property.

The 5 April 2019 rebasing also applies to non-resident widely-held companies taxed on residential property gains from that date.

The government has abolished the Annual Tax on Enveloped Dwellings (ATED) related to CGT following the introduction of these changes.

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All non-residents, including entities and individuals, are now taxed on direct disposals of UK real estate.

3. Offsetting Losses

Under the current regime, non-residents can offset losses realised on UK residential property against gains on UK commercial property, and vice versa. This flexibility allows for more strategic tax planning.

A group company can also claim group relief for losses it realises, provided it meets the relevant conditions.

4. Indirect Disposals of UK Real Estate

An indirect disposal involves selling an interest in an entity that owns UK real estate, whether commercial or residential. This includes selling shares, partnership interests, or settled property interests that derive value from UK land. It also covers disposals of interests in UK funds, such as REITs and PAIFs.

For an indirect disposal to fall within the scope of UK tax:

1. The entity must be ‘property-rich’: At least 75% of the value of the company's qualifying assets must derive from interests in UK land. This 75% test is based on the market value of the company’s assets and is not reduced by liabilities.
2. The non-resident must hold a 25% or more interest: The non-resident must hold a 25% or more interest in the entity at the date of disposal or have done so within the previous two years unless this was for an insignificant period.

Trading Exemption: The legislation grants a trading exemption if the company uses all UK land interests in a qualifying trade, provided it has carried on the trade commercially for at least one year before the disposal and continues it after the disposal. This exemption is particularly relevant to investors in the retail and hotel industries.

Rebasing to 5 April 2019: For indirect disposals, rebasing applies to the value of the interest in the entity, rather than the property itself. You calculate the gain based on the increase in the value of the interest in the real estate entity since April 2019.

Alternative Calculation: It is possible to elect to calculate the gain by referencing the original cost of the interest. However, if this calculation results in a loss, the loss is not allowable for tax purposes. As with direct disposals, there is no option to time apportion gains on indirect disposals. Therefore, valuations should be obtained as of April 2019.

UK Real Estate Tax Matter

5. Tax Treaties and Anti-Avoidance Measures

Some double tax treaties may override the UK's domestic taxing rights on disposals of UK property. While direct disposals of UK real estate rarely trigger this, it could apply when someone holds UK property through an overseas partnership or sells shares in a UK property holding company, and the treaty allocates taxing rights solely to the shareholder’s country of residence.

Anti-Avoidance Provisions: To counteract treaty shopping - where a treaty is used to circumvent UK tax rules - the legislation includes anti-avoidance measures. These provisions allow HMRC to counteract tax advantages that are contrary to the purpose of the double taxation treaty.

Renegotiation of Treaties: The UK has renegotiated some treaties to protect its taxing rights on UK land. For example, the new UK/Luxembourg treaty entered into force on 22 November 2023 and lets the UK tax gains on shares in UK property-rich companies, with effect from 6 April 2024 for CGT and 1 April 2024 for corporation tax.

6. Tax Returns and Payment Obligations

Non-Resident Individuals: Non-residents must file a tax return reporting the disposal and pay the tax due within 60 days of the disposal. A return is required even if there is no tax to pay. This applies even if you already file Self Assessment returns: the tax must still be paid within 60 days, and you then also include the disposal on your Self Assessment return.

Listen to Episode 3 of our talkinTAX podcast to understand the rules around the new capital gains tax returns introduced a few years ago.

Non-Resident Companies: Companies must register for corporation tax within three months of the disposal. Payment is due within the normal corporation tax deadlines, typically 9 months and 1 day after the end of the accounting period. If the gain exceeds £1.5 million, an earlier deadline of 3 months and 14 days applies.

Non-UK Company Becoming UK Resident: If a non-UK resident company becomes a UK resident after 6 April 2019 and disposes of UK real estate, it can rebase the value to 5 April 2019 for commercial property or 5 April 2015 for residential property. However, any gain arising before the rebasing date may still be taxable on UK resident shareholders.

7. Next Steps for Non-Resident Investors

Given the complexities and frequent changes in the legislation surrounding UK real estate, it is imperative for non-resident investors to seek professional tax advice. At ASWATAX, we specialize in helping non-residents structure their investments in the most tax-efficient manner, taking into account their unique circumstances and objectives.

Since we deal with this on a day-to-day basis, we understand it thoroughly and are well-positioned to review all of your affairs and proactively advise you, creating significant value and financial benefit through tax savings.

You should review your existing property structures to assess the impact of the new rules and identify any opportunities for tax savings.

Summary Table:

Below is a table summarizing the tax position for disposals of UK real estate on or after 6 April 2019 by non-residents. The rates shown apply to disposals from 30 October 2024.