There are a number of topical issues that should be considered by non-residents investing in UK residential property.
ATED and ATED-related capital gains
The annual tax on enveloped dwellings (ATED), which was introduced in 2013, applies to residential properties owned by companies.
Initially the charge applied to properties with a value of more than £2 million but this threshold was reduced to £1 million from 1 April 2015 and will fall further to £500,000 from 1 April 2016. An ATED period begins on 1 April each year. The ATED return and payment are normally due by the following 30 April; i.e. within the next 30 days. Exceptionally, for the period beginning on 1 April 2015 the return will be due on 1 October 2015 with payment by 31 October 2015, but only in respect of the new charge on properties between £1 million and £2 million. These extended time limits will not apply when the threshold falls to £500,000 in 2016.
For the year beginning on 1 April 2015 the rates of charge increased by more than 50%.
There are a number of reliefs, of which the most significant is for properties that are let commercially to tenants unconnected with the owner. Previously a return was required for a property even where a relief was available to eliminate the liability but for years beginning on 1 April 2015 onwards it is only necessary to submit a single ‘relief declaration return’ for each category of relief, which does not require details of individual properties affected. To accommodate this change, for the year beginning 1 April 2015 only, the due date for submission of a relief declaration return is 1 October 2015. Thereafter it will revert to 30 April.
A capital gains tax charge applies, at a fixed rate of 28%, to gains arising on disposals of UK properties within the ATED charge, including disposals made by companies resident overseas. The charge applies only to that element of the gain that arises from 6 April 2013 onwards (or, in the case of properties brought within the ATED charge by the reductions in the threshold to £1 million or £500,000, to the element of the gain that arises from 6 April 2015 or 6 April 2016, as appropriate). A return must be made, and the tax must be paid, by 31 January following the end of the tax year. Where the company has not been sent a tax return it must notify HMRC of the disposal by 5 October following the end of the tax year.
Initially the focus for the companies concerned was on identifying affected properties and complying with reporting and payment obligations. As the tax ‘beds in’ it is important for these companies to keep track of:
- acquisitions and disposals of properties within the charge;
- changes of use that may bring properties within the definition of ‘residential property’ (or take them outside that definition);
- changes in circumstances that may bring a property within the terms of one of the available reliefs, or result in it falling outside those terms; for example, the commencement or cessation of commercial letting, or occupation by a person connected with the company;existing properties that are brought within the charges by the changes to the thresholds.
In addition, taxpayers who considered their options on the introduction of the ATED charge and decided to retain their existing structures may wish to reconsider their position in the light of the significant increases in the ATED charge from 1 April 2015 and the Budget announcements.
The capital gains tax charge on non-residents
From 6 April 2015 capital gains tax (CGT) was extended to non-UK residents holding UK residential property directly, irrespective of the value. Only the gain since 6 April 2015 is liable to the charge. That amount is determined either by reference to a valuation at 6 April 2015 or by time-apportionment, at the option of the taxpayer.
In broad terms the new charge applies to individuals, partnerships and trusts, and to companies that are the private investment vehicles of family trusts and small groups of individuals but not to large, widely-held companies.
The tax rate for non-resident individuals is (as for UK-resident individuals) 18% or 28% depending on the level of income and gains. For companies, the ATED-related CGT charge outlined above takes precedence over this new charge. Where non-resident companies do not fall within the ATED charge (either because the property is valued below the threshold or because it is eligible for one of the available reliefs) the CGT rate is the UK corporation tax rate of 20%.
Taxpayers newly within the scope of this charge may wish to consider whether to sell existing UK residential property before any significant charge arises. Those who make disposals, either now or in the future, will need to consider:
- whether the properties concerned fall within the definition of ‘residential properties’ for this purpose;
- whether any previous or proposed change of use since 6 April 2015 will bring them within this definition, or take them outside it;
- the value at 6 April 2015 (in order to determine whether to calculate the gain by reference to that value or to time-apportion the total gain);
- the obligation to notify the UK tax authorities of any disposal within 30 days of completion;
- the obligation to pay the tax due within the same 30-day period unless the taxpayer already submits tax returns to HMRC, in which case payment may be made within the normal self-assessment timescales.
For further information, see our updated factsheets: