Residential Property and Capital Gains Tax: Changes Afoot for Non-UK Residents and Multiple Home Owners

Capital Gains Tax has found itself in the spotlight in recent weeks, owing to two significant changes to the CGT and residential property landscape. Firstly, the government has moved to limit the final period exemption that allowed those owning more than one residential property to reduce CGT on second homes. Secondly, looking forward, plans to extend the CGT regime to non-UK residents selling UK residential property appear to be going ahead, and are set to be in force from April 2015. We take a look at these reforms in more detail.

Final Period Exemption: From 3 years to 18 months

If you own a property and it remains your main residence for the entire period of ownership, there will be no CGT payable upon a sale. If you own more than one property, partial CGT relief is available in respect of the periods of time in which the property to be sold was in fact your main residence.

Previously, the final 36 months of ownership before sale were deemed a period of residence, as long as the property had at some time been your main residence. This allowed the individual to move house before selling the property without losing the full benefit of the CGT relief.

Such a relief is inevitably open to exploitation. Under this regime, individuals are able to reduce CGT on second homes by alternating their main residence election. In doing so, they are able to take advantage of the 36-month rule in respect of more than one property.

To reduce the potential for manipulation, the government has moved to halve this period to 18 months. The change is now in effect, and applies to any residential property for which contracts are exchanged on or after 6 April 2014. There are exceptions for disabled individuals and those moving into residential care, who will continue to benefit from a 36-month exemption period.

CGT on Residential Property for Non-UK Residents

In the Chancellor’s Autumn Statement of 2013, it was announced that the government planned to extend CGT to cover the disposal of UK property by non-UK residents. The consultation was released on 28 March 2014.

At the moment, non-UK residents are not liable to pay UK CGT (apart from on business assets). However, as part of the government’s efforts to increase the tax base, it is intended that non-UK residents disposing of UK residential property will be liable for CGT from April 2015. Importantly, it is currently envisaged that the charge will only apply to gains arising from April 2015, and therefore there will be some form of rebasing.

To some surprise, the consultation revealed that some forms of student accommodation will fall within the definition of “residential property”, and non-resident partners of partnerships, some non-UK companies and non-UK resident trustees are expected to be targeted in addition to non-UK individuals. The government currently intends that non-resident individuals will have the benefit of the CGT annual exemption, just as UK residents do presently. The availability of other reliefs to non-residents is as yet unclear.

Take Advice

Overall, the changes already in force and those anticipated will have a considerable impact on some residential property owners. Those affected are encouraged to seek professional advice about their CGT liability in order to maximise efficiency.

This article was written by Ian Bradshaw, Partner, Private Client, with assistance from Trainee Solicitor Alex Barker.

This guide is for general information and interest only and should not be relied upon as providing specific legal advice. If you require any further information about the issues raised in this article please contact the author or call 020 7404 0606.