Capital Gains Tax in the UK: How are Non-Residents Liable?
"The power of taxing people and their property is essential to the very existence of government."
- James Madison
Tax is an amount that is paid by either individuals or corporations towards the government of the jurisdiction at which they are situated, to help finance activities of the government. Capital Gains Tax is a form of tax that is imposed on the profit that is generated by virtue of the disposition of assets belonging to individuals and corporations. In the United Kingdom, Capital Gains Tax is imposed on both residents and non-residents alike.
According to the Government of United Kingdom, disposing of an asset includes the sale of an asset, gift/transfer of an asset from the owner to another, swapping an asset for something else, getting compensation for an asset (in the event the asset has been destroyed or lost). Capital Gains Tax is imposed on the following:
- Personal Possessions
- Property (excluding main residential home)
- Main Residential Home (subject to size/purpose)
- Business Assets
Capital Gains Tax will not be imposed if the profit that is generated is within permitted allowance. The permitted allowance is £12,000, with trusts having an allowance of up to £6000.
- Personal Possessions:
Personal possessions are those items which are in possession of an individual such as jewellery, paintings, antiques, etc. Capital Gains Tax may be imposed when personal possessions generate a profit that is in excess of £6000. It must be noted that Capital Gains Tax is exempted for items that have a limited lifespan, i.e., a lifespan of fewer than 50 years, and cars that have been in personal use.
- Property (excluding main residential home):
For any property that is not a main residential home, Capital Gains Tax will be imposed. The following are properties on which the tax can be levied on:
- Buy-to-let properties
- Business Premises
- Inherited Property
Capital Gains Tax is calculated on the difference between the amount attained on sale of the asset and the amount at which the asset was acquired. This difference, if it is a profit and does not fall within the bracket of allowance granted, will be subject to tax. In certain situations, the market value of the asset is utilized to calculate the tax value. They are:
- For gifts (excluding those gifts made to a charity or civil partner), the market value will be calculated on the date at which the gift was made.
- For assets sold for less than what it was worth in order to help the buyer, the market value will be calculated on the date at which the sale happened.
- For assets that were inherited and the person who inherited was not aware of the Inheritance Tax Value, the market value will be calculated on the date of the death of the initial owner.
- For assets that were owned prior to April 1982, the market value of the asset will be calculated as per 31 March 1982.
Over the course of disposing of the property, it is entirely possible that the seller will incur a variety of costs and might presumably think that such expenses can be deducted from the tax amount. That is not the case, as only selected expenses will be allowed to be deducted from the tax amount. Such costs are:
- Estate agents' and solicitors' fees that are incurred over the course of disposing of the property.
- Expenses that arose for enhancement and improvement works will be allowed to be deducted from the tax amount. It must be noted that such works do not account for the costs related to maintenance.
- Main Residential Home:
If the property that is being disposed of happens to be the seller’s main residential home, the seller will be entitled to a Private Residence Relief, with the gain generated from such a sale exempted Capital Gains Tax provided:
- The property in question was the only property of the seller and resided there all the time.
- The property had not been let out.
- The property had not been used for business
- The entire property (inclusive of the grounds) is less than 5,000 sq.mtr.
- The property was not bought in order to make a profit from the sale.
A marginal value of tax will be imposed on the seller if they have either let out a part of the house for a period of time or have used a part of the house for business or if the entire property is greater than 5,000 sq.mtr in size. Under the Private Residence Relief, during the first 12 months of ownership of the house, if the house in question was either being built or renovated, and residence was in the previous property or if the house was used as the main residence within 12 months of ownership, then such a period will be exempted from tax valuation. A similar period of exemption from tax valuation is given for the final 18 months of ownership of the house, a period known as the Final Period. During the Final Period, the seller can claim full tax relief (partial relief if the property is more than 5,000 sq.mtr). If the seller happens to be disabled or is in long-term residential care, then the Final Period is calculated for 36 months, instead of the regular 18. If the seller has never lived in the house that is being sold, then they will not be eligible to claim any relief under the Private Residence Relief.
- Business Assets:
For businesses involving a sole trader or a partnership, Capital Gains Tax will be imposed on the disposal of any business asset, such as:
- Land and building
- Plant and machinery
- Registered trademarks
- Business reputation
For all other organizations, a tax known as corporation tax will be levied on the profits that are generated from the sale of assets. Like residential homes, there are certain costs that can be deducted with relation Capital Gains Tax on the gain of an asset and its disposal. They are:
- Fees related to the valuation and advertising of asset.
- Costs incurred concerning the improvement of an asset (excluding maintenance costs)
- Stamp Duty Land Tax and Value Added Tax
Certain costs, such as the interest amount on loans taken in order to purchase the asset and expenses such as business expenses, cannot be deducted from the valuation of the tax.
Businesses that own high-value residential property in the UK and pay Annual Tax on Enveloped Dwellings (ATED) must pay Capital Gains Tax, if the property is sold prior to 5 April 2019 and Corporation Tax if sold after 6 April 2019. If the value of the property is in excess of £500,000, is a dwelling i.e., hotels, guest houses, care homes, student halls of residence, etc., situated in the UK and owned wholly or partly by a company, in partnership with any company, or a collective investment scheme, then ATED-related Capital Gains Tax must be filed. If the property is directly owned and not through a company, then ATED and ATED-related Capital Gains Tax need not be submitted.
- Shares (not in ISA or PEP):
When it comes to the disposal of shares, Capital Gains Tax will be imposed on the following:
- Shares that are not part of ISA (Individual Savings Account) or PEP (Personal Equity Plan).
- Share units that are part of a unit trust.
- Bonds (excluding Premium Bonds & Qualifying Corporate Bonds).
It must be noted that no Capital Gains Tax can be imposed on any of the following:
- Any shares that are a part of ISA or PEP
- Any shares that are a part of any employer Share Incentive Plans (SIPs)
- Any shares in UK Government gilts (including Premium Bonds)
- Any qualifying corporate bonds
- Employee Shareholder Shares
Any gift that is made to a civil partner or charity will be automatically exempted from Capital Gains Tax. The tax will be imposed if:
- The partners have separated and have not lived together for the duration of one tax year.
- If either partner sells the asset after receiving it as a gift.
- If an asset has been given away to charity, depending on the calculation, a Capital Gains Tax will be imposed if the asset was sold for more than what it was bought for and less than what it's market value is.
Rate of Taxation:
In the United Kingdom, there is a tax bracket that is in existence, wherein the tax rates are divided on the basis of income. There exists a tax-free allowance of up to £12,000 per annum. The following table illustrates the tax rate.
£12,501 - £50,000
£50,001 - £150,000
The rate of Capital Gains Tax is determined on the basis of the tax bracket. For those in the Basic Rate bracket, the rate at which Capital Gains Tax will be imposed is 10% on normal gains and 18% on gains arising out of the disposal of residential property. For trusts and businesses, involving sole trader or partnerships, the rate of Capital Gains Tax is 20% on normal gains and 28% on gains arising out of the disposal of residential property.
For those who fall within the Higher Rate tax bracket, the rate of Capital Gains Tax will be 20% on normal gains and 28% on gains arising out of the residential property. If there have been any losses recorded in a tax year, such losses can be counted against the gains generated from the disposal of assets in order to reduce the value of taxation. It must be noted that such losses can be carried over to succeeding tax years, depending on the reliefs availed for the preceding years.
Since April 2015, non-residents of the United Kingdom are liable to pay Capital Gains Tax on any direct disposal of residential assets. Such non-residents must inform the HMRC (Her Majesty's Revenue and Custom) within 30 days from the date of disposal. The payment of any such tax can also happen within this period or can be deferred, but any failure to inform can result in penalties. From April 2019, this was extended to direct or indirect disposal of non-residential property as well. By direct disposal of non-residential property, the following come under the purview:
- Commercial property
- Agricultural land
- Any other land that has not been used for residence.
Indirect disposals are those disposals, wherein a non-resident who invests 25% or more, in any company that derives 75% of its value from UK land, and any part of the 25% is disposed of. The Capital Gains Tax will be calculated on the value of shares that are disposed of and not on the value of the UK land that is held by the non-resident.
For non-residents who sell their home, to be exempted from Capital Gains Tax, they must have spent at least 90 days over the course of a tax year, in the UK and such home must be nominated as the main residential home when the HMRC is informed of the sale. It must be noted that for non-resident companies, the tax imposed is Corporation Tax and not Capital Gains Tax, at a rate of 19%. The following will be considered to be a non-resident company:
- Any company that is not registered with a UK Company.
- Collective Investment Vehicles or CIVs that are deemed to be a company (and has not elected for any exemption treatments) and property-rich.
- Life Insurance Companies.
Collective Investment Vehicles can avail exemption from paying Capital Gains Tax by opting two methods. They are:
- Transparent Method: Under this method, the HMRC will consider any property that the CIV holds as directly held by the investors. This will enable the HMRC to tax the investor directly and not the Vehicle. It must be noted that the selection of such a method can only be done once and is irrevocable. Furthermore, prior to making such a selection, the consent of all shareholders of the Vehicle is required.
- Exemption Method: Those Vehicles that opt for this method must ensure that they must be non-close, i.e., controlled by more than five investors, and must be a body corporate that trades it's shares on a recognized stock exchange. Certain bodies such as sovereign wealth funds, real estate investment funds and pension funds can be exempted from the conditions imposed. Under this method, the Vehicle and its subsidiaries are exempted from Capital Gains Tax on direct or indirect disposals of UK property. The tax is imposed on the investor level when assets are disposed of.
Once the selection is made, it is irrevocable, and the fund manager must submit annual reports to the HMRC. Under the Exemption Method, it must be noted that the consent of investors is not required.
The imposition of Capital Gains Tax on both residents and non-residents has been brought forward to bring in parity in the payment of taxes between the two. Since April 2019, such has been the case, and the UK Government will reap tremendous benefit from this change, bringing in additional revenue.
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