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.

Table of Contents

• 1. Overview of the Extended UK Capital Gains Tax Regime

• 2. Direct Disposals of UK Real Estate

  • Commercial Property

  • Residential Property

• 3. Offsetting Losses

• 4. Indirect Disposals of UK Real Estate

• 5. Tax Treaties and Anti-Avoidance Measures

• 6. Tax Returns and Payment Obligations

• 7. Next Steps for Non-Resident Investors

  • 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: 10% or 20% (depending on income level)

• Trustees: 20%

• Companies: Corporation tax (currently 19%, though future changes should be monitored)
  

Residential Property

For residential property, the rebasing date remains 5 April 2015. Individuals continue to pay tax at rates of 18%, 24% or 28%, depending on income levels, and trustees pay tax at 24% or 28%. 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.

Best Property Tax Advisor in UK

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 government has indicated that it may renegotiate certain treaties, such as the UK/Luxembourg treaty, to ensure that the UK’s taxing rights are preserved on disposals involving UK land.

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. If the individual already files self-assessment returns, the CGT liability can be deferred until 31 January following the tax year of the disposal.

Listen to Episode 3 of our talkin.TAX 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.

Type of Disposal	Direct Disposal	Indirect Disposal
Residential Property	Individuals and Trustees - Rate: 18% / 28% (trustees 28%) - Rebasing: 5 April 2015 - Calculation: Time apportion, cost, or MV on 5 April 2015	Individuals and Trustees - Rate: 10% / 20% (trustees 20%) - Rebasing: 5 April 2019 - Calculation: Cost or MV on 5 April 2019
Commercial Property	Individuals and Trustees - Rate: 10% / 20% (trustees 20%) - Rebasing: 5 April 2019 - Calculation: Cost or MV on 5 April 2019	Individuals and Trustees - Rate: 10% / 20% (trustees 20%) - Rebasing: 5 April 2019 - Calculation: Cost or MV on 5 April 2019

Meet Omar Omar is a Chartered Tax Advisor (a.k.a an expert on tax issues) and founder of ASWATAX. He regularly shares his knowledge and best advice here in his blog and on other channels such as LinkedIn. Book a call today to learn more about what Omar and ASWATAX can do for you.

*Disclaimer: ASWATAX is a firm of Chartered Tax Advisors, and we strive to provide accurate, up-to-date tax insights. Tax laws may change, so this content is for general guidance only and not a substitute for professional advice. Seek independent tax and legal counsel before making decisions. ASWATAX is not liable for any loss from reliance on this information. Use at your own risk.