The draft 2015 Finance Bill was published on Wednesday 10 December and contains details of the changes being made to the capital gains tax (CGT) relief which may apply on the disposal of an individual’s home – principal private residence (PPR) relief.
Under current legislation, PPR relief is available to ensure that UK resident individuals do not pay CGT on gains accruing on a property during periods when that property is their main residence. The remaining portion of the gain is subject to CGT with relief being given for specified periods. Final period relief allows the last 18 months of ownership to be treated as a period of residence. In addition, periods of absence from the property for particular reasons, such as overseas employment and periods when the property was let to another party, may also be treated as periods of residence where certain conditions have been met. PPR relief is not available for companies.
Non-UK resident individuals do not currently pay CGT on disposals of UK residential property or any other UK assets (unless the sale is part of a trade being carried on in the UK). However, a CGT charge for non-resident companies owning certain ‘high-value’ residential property was introduced on 1 April 2013. Currently, ‘high-value’ means property with a value of £2,000,000 or more but this is decreasing to £1,000,000 from 1 April 2015. This high-value property CGT charge applies to gains made on the disposal of residential properties, although there are exceptions, including the letting of residential properties.
The government has announced that with effect from 6 April 2015 CGT is being extended to non-UK residents (whether individuals or companies) holding relevant UK residential property, irrespective of the value, and the PPR rules for individuals have been amended as a consequence of this.
Generally, a non-UK resident will not have their main residence in the UK and so the PPR relief will not be appropriate. However, under the current rules an individual with more than one residence can elect which of their properties will qualify for PPR by notifying HMRC of their choice, even if the elected property is not in fact their main residence. If the government continued using this current system when the CGT charge on non-residents is introduced, non-resident individuals would most likely elect their UK property to benefit from the PPR relief, subject to the tax rules in the other territory, so as to avoid a CGT charge. The individual’s other residences outside the UK would remain outside the scope of CGT.
The government has therefore amended the PPR rules so that a property may only be treated as an individual’s PPR for a tax year where the person has either been tax resident in the same country as the property for that tax year or resided in the property for at least 90 midnights in that tax year. This applies equally to a UK resident individual disposing of an overseas residence as it does to a non-UK resident disposing of a UK residence.
Where the property is only owned for part of a tax year, the 90 midnight test is reduced accordingly and the relevant fraction of 90 midnights is applied instead. Any midnight spent by an individual’s spouse or civil partner in the property may be counted as a midnight spent by the individual in that property (although the day cannot be counted twice). Where an individual has two or more residences in the same country, the number of days spent at those properties can be aggregated for the purpose of the 90 midnights test.
When reviewing the availability of PPR relief and deciding on the number of midnights to stay in a particular property, consideration should be given to the possible impact this may have on the individual’s residence status under the statutory residence test.
Where a non-UK resident individual disposes of their residence, the use of the property prior to 6 April 2015 is ignored in determining their eligibility for PPR relief unless the individual elects and specifies the date, prior to 6 April 2015, when the property was their only or main residence.
The 2015 Finance Bill is still in draft format and so until it receives Royal Assent (expected in July 2015) the legislation may be subject to change. However, it would be sensible for non-resident individuals and companies to review the existing structures of property ownership before the new rules come into effect on 6 April 2015. The property ownership structure may have been reviewed by companies when the high-value property CGT charge was introduced on 1 April 2013 but it is worth revisiting to ensure there are no future tax surprises.
Should you have any questions, please contact your usual Moore Stephens adviser.
Private client tax