Rebalancing the tax landscape

"Britain is an open country that welcomes investment from all over the world". This message from the government is clear; foreign wealth and investment in the UK remain a priority and key economic strategy. However while large-scale institutional foreign investment keeps favour, on the private wealth front, the government is tightening the reins on the non-UK resident individual - or so it would seem.

A change in the tide

It has long been established that non-UK residents are not subject to UK capital gains tax (CGT). But parliament began to break away from this model in 2013-14 with the introduction of the Annual Tax on Enveloped Dwellings (ATED) CGT charge. Since then this trend has continued and the government has been quick at work to close other doors to non-UK resident individuals.

A number of changes are afoot this year. One of those is the increase in the remittance basis charge. Another is the consultation on elections for the remittance basis being binding for three years, rather than one year. Another (and the focus of this blog) is the charge to CGT on non-UK residents on disposals of residential property.

Balancing taxes

From 6 April 2015 UK CGT will be extended to non-UK residents selling residential property, including non-resident individuals, personal representatives, trustees, partners of partnerships and companies in so far as companies are not charged CGT by the ATED legislation. The changes are not, we are told, in pursuit of closing tax avoidance loopholes or of taxing built up gains that are so far not taxable; their purpose is to prevent the imbalance between the UK-resident individual and the non-resident by making the tax system fairer.

Obviously there will be some economic gain for the government, but in its own words, the measure is not expected to have any significant economic impact. The government's own assessment suggests that extending capital gains tax to non-residents will raise only £130m in 5 years, with the first expected revenue to be £15m in the 2016-17 tax year. There are some obvious reasons for this.

All non-UK residents will not be affected

The option to rebase property values at their 6 April 2015 value or alternatively, to 'time apportion' the whole gain over the period of ownership, will go a long way to ease the impact on non-UK residents. It will least allow extra time to re-organise their affairs if they are concerned about CGT going forwards. Further, the impact of the tax will be limited for many, if their country of residence has a double tax treaty with the UK.

Any UK tax that would normally be payable may be relieved or eliminated by a double tax treaty, where the gain is also taxable in the territory of residence. However, where there is no equivalent capital tax then this will not help. Equally significant is that non-UK residents will be entitled to the usual reliefs such as Principal Private Residence Relief (with some amendment - click here for more detail) and the annual allowance in the same way that UK residents are (£11,100 from 6 April 2015).

The list of exemptions to the new regime makes it clear that institutional non-UK investment should in no way be curtailed. Certain types of communal accommodation or investment vehicles are excluded. Forms of accommodation include:

• student accommodation, defined as a building for use by students with at least 15 bedrooms and occupied for more than 50 per cent of a tax year by students for the purpose of attending a course of study;

• residential accommodation for school pupils, or children, or members of the armed forces;

• residential care homes for persons in need of personal care by reason of old age, disability, past or present dependence on alcohol or drugs or past or present mental disorder - including a hospital or hospice; and

• a prison or similar establishment, or hotels, inns and similar establishments.

Also exempt from charge are:

• non-UK resident institutional investors that are diversely owned and meet the 'genuine diversity of ownership' test;

• companies that are widely owned, defined as a company not controlled by five or fewer persons; and

• unit trusts and open-ended investment companies (OEICs) will not be subject to the charge providing they meet a 'widely marketed fund' condition.

These exceptions ensure that genuine commercial investors remain outside of the new CGT charge. This will protect pension funds and disposals by non-UK investors of shares or units in other arrangements, such as Collective Investment Schemes (CIS) or Real Estate Investment Trusts (REITs). If these widely-marketed and close company tests are not met, such as with private investment vehicles used by family units or small groups of individuals, then it is clear that these should be taxed in line with their UK-resident counterparts.

There is a clear agenda to be seen in the extension of CGT to non-UK residents on disposals of residential property - that is, that the tax system is seen to be fairer, but no more than that. The government do not want to deter genuine commercial investment into the UK and have been careful to safeguard that.

When looked at in isolation, the new CGT regime may have a limited impact on non-UK resident individuals, but when looked at in line with the other layers of change in the private wealth arena, it is clear that the landscape for the non-UK resident individual is significantly changing.

Certainly the myriad of taxes to be considered when purchasing or owning UK residential property is increasing; inheritance tax, stamp duty land tax, income tax, ATED, and now CGT. Consequently the right form of ownership for clients will need a much more detailed form of consideration.

James Sedgley is an associate in the private client team at Penningtons Manches

The firm writes a regular blog for Private Client Adviser