Capital Gains Tax Reform

16.02.15

With the much publicised capital gains tax reform coming into effect this April, Stevie King asks what the new rules will mean for international and expat investors.

While national property indices predict price growth across the UK to the tune of 5.5% in 2015, the outlook for the prime central London market appears rather more subdued with While national property indices predict price growth across the UK to the tune of 5.5% in 2015, the outlook for the prime central London market appears rather more subdued with several leading estate agency firms, Savills and Strutt & Parker among them, forecasting a more restrained gain of 2%-4% - a stark contrast to 2010 and 2011 when prime central London prices surged by over 13% year on year.
Whilst improved economic foundations would suggest that overall prices will continue to rise over the next few years, industry research indicates that the biggest ‘perceived’ uncertainty surrounding the property market is the impending election.

Amongst the legislative changes in train from last year’s Autumn statement from Chancellor George Osborne, is the closing of a tax loophole in respect to Capital Gains. Due to come into effect from April 6th, and set to level the playing field for domestic and foreign investors, the revision will
effectively institute a new regime for those selling London property.

Whilst the new tax may be welcome news for British homeowners and domestic investors, reaction from the real estate industry remains mixed with some investment experts expressing concern that the proposed 28% tax rate could provide the wrong signals to overseas investors with a subsequent
dampening effect on house prices.

“Foreign investment is a key part of any developed country’s economy and one that is vital for those playing on a global stage,” says Gary Hersham, managing director of Beauchamp Estates. “Clearly, Capital Gains Tax will factor into purchasing decisions and there will be some buyers who will inevitably look elsewhere, among them British expats who are keen to keep a home here. Moreover, whilst it’s true that many non-resident, non-domiciled owners of UK property are only in the country for a limited number of days each year, their homes, and the attendant services they consume, continue to contribute to the local and national economy.”

For international tax advisor Simon Connelly, it’s more a case that with taxes only applicable to gains after April 2015, many international investors, and expats will “likely already be seeking out new acquisitions” to lock in prior to the deadline: “Property investment companies and those with larger
portfolios are also likely to fuel the market with increased activity ahead of the change too,” he suggests.

Banking firms like Barclays have also been quick to highlight London’s current CGT discrepancy in relation to many other top tier destinations. Adds Connelly; “The tax will bring the UK in line with other key property investor markets such as New York and Paris where equivalent taxes can approach 35% to 50% depending on the owner’s residency status. For long term investors the tax take will effectively be eroded. Over a 10 year period for example, the impact of 28% tax is low, annualised at under 3% per annum. Adds Jennet Siebritis Head of Residential Research at CBRE UK: “The majority of our international clients don’t buy for preferential tax treatment, but for a much wider range of factors which include a stable political climate and favourable currency rates. More pertinent perhaps is that investors obtain valuations around April 6th, in order to prove values when they come time to sell.”

CGT - THE FACTS

What is the current situation regarding CGT?
Under current UK tax rules, non-UK resident individuals are generally outside the scope of UK capital gains tax (CGT). As a result, a non-UK resident individual who owns UK residential property (either as a home or as a rental property) can sell that property at a gain, without paying any CGT. However, in this respect the UK is out of step with most other countries, which tax gains on property sales by non-resident owners.

When does the new charge kick in?
From April 2015 any property that is held on this date will be subject to CGT. Capital losses will be available to set against taxable gains.

Who will be affected by the changes?
Non-resident individuals, corporates, trusts and funds, but with exemptions for certain types of entity such as offshore pension funds, REITs and other funds where ownership of the investment vehicle is widely spread.

What is the new tax rate?
Proposed capital gains bands for expat and foreign investors are 18% and 28% depending on other UK income.

What type of property?
Residential property, including property acquired for investment purposes, as well as property occupied as a home by the owner. There will be a
limited exception for communal dwellings which are attached to an appropriate institution such as university halls of residence.

How will the tax be enforced?
When the property is sold, the buyer will be required to withhold a certain amount of the purchase price and pay it over to the UK tax authorities. There may also be reporting requirements for the seller, similar to the way in which SDLT (Stamp Duty Land Tax) is collected.

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