What’s New? - Property Tax Update

Lee Sharpe provides an update on two important developments to come out of the Chancellor’s 2013 Autumn Statement.

The Chancellor appeared to be in good spirits in his Autumn Statement speech in December 2013, with positive figures indicating that growth was even better than previously forecast.

Two measures grabbed the headlines for property investors: the cynics amongst us might observe that one of them appears to be more pitched at gaining popularity than achieving anything useful; see if you can spot the candidate!

Capital gains tax charge on ‘future gains’ made by foreign investors in residential property

Generally, an individual who is resident in the UK for tax purposes is chargeable on his or her worldwide income and capital gains. But someone who is not tax resident in the UK may dispose of UK property without fear of UK capital gains tax (CGT) (one notable exception being assets used in a trade carried on in the UK). 

Of course gains may be taxable wherever they are resident for tax purposes, although there are some territories which have no equivalent capital gains regime; for many years, people have emigrated from the UK to a favourable regime, made disposals and escaped tax completely – perfectly legitimately (having said that, I recall one former client who simply couldn’t bear to remain away for the required period and, after 12 months, resolved to return to the UK, and face an eye-watering CGT bill).

But that is set to change for non-resident owners of UK residential property. From April 2015, there will be a CGT charge on any ‘future’ gain. Since the announcement referred to ‘future’ gains more than once, it seems likely that there will be a valuation exercise so that only the uplift in value after the legislation is introduced in April 2015 is subject to CGT. 

This is borne out by the fact that the government expects to reap only £15million from this new charge by 2016/17. 

Many readers will be aware that the government targeted offshore corporate ownership of residential properties over the last year or so, with punitive stamp duty land tax charges and a new annual tax charge; another aspect was a new CGT charge when offshore companies sell high-value residential properties. 

But a sale of the company shares, rather than the property itself, may escape that special CGT charge and it could well be that these new proposed rules bring about a revival in offshore property companies, despite the annual charge, etc. This may be particularly the case for investment properties, since the assault on offshore corporate ownership ignores property developers and property investment businesses.

Whether the newly proposed personal CGT charge follows a similar approach, focusing more on non-resident investors’ UK homes, is uncertain. But it may well prompt sales prior to 2015 and beyond. 

It does seem likely that the normal CGT relief for selling one’s main home will still be available – although some Russian oligarchs may want to blow the dust off their main residence nominations, as the second key measure announced by Mr. Osborne promises to be a significant inconvenience to many more residential property owners.

Perhaps of more concern to us lesser mortals will be the Chancellor’s tinkering with the cherished CGT main residence relief. While many people enjoy this CGT relief without realising, others have used the mechanics of the relief to great advantage – not least those MPs with a penchant for ‘flipping’ second homes.

Basically, all of the capital gain on a person’s main residence is exempt, provided it has been occupied as the main residence throughout the period of ownership. But there are various sub-reliefs, such as permitted periods of absence by reason of employment overseas. 

Perhaps the most useful is (was) the ‘guarantee’ that, whatever happened, the last 36 months prior to sale were pretty much always deemed to be occupied as the main residence, even if you had moved on to one or more qualifying main residences in the interim. This rule was introduced when the property market was particularly stagnant, to allow people up to three years to sell their previous home without tax penalty. It is this ‘three-year rule’ which is to be restricted from April 2014.

Allied with the rules which allow the owner to nominate which of his residences is the qualifying main residence – and then to change his mind soon afterwards – there was scope in a rapidly rising market to live in a property for a relatively short period, flip the nominations around and ‘bank’ a full three years’ exemption on more than one property. So despite the exemption theoretically applying only to one main residence, the relief could run concurrently on several residences (HMRC’s chief line of attack was to challenge whether the property ever actually qualified as the taxpayer’s residence in the first place).

The proposal is to reduce the period which automatically qualifies as occupation as the main residence, from the final 36 months to just the last 18 months, from April 2014. 

This will allow far less scope for MPs (and others) to ‘run’ several exempt residences simultaneously. But it will also mean more pressure to sell once the property has been vacated. 18 months is likely to be sufficient time for many sales, but not all. For instance, what if someone is obliged to relocate elsewhere in the UK for work on (say) a two year contract, and has already used up his ‘free’ periods of absence?

The draft legislation does allow the 36 month period to remain in full, for example when someone leaves their main residence to move into care, which is welcome, but I should have preferred to see that saving extended for other circumstances where absence is beyond the owner’s control – if the restriction is indeed intended to target only abuse.

Interestingly, the Treasury estimates that this will yield up to £255 million additional revenue up to 2016/17, whereas the measures against non-residents will yield just £55 million (although to be fair, that measure starts in 2015).

Both measures will probably encourage property sales and perhaps ease some of the upward pressure on house prices – which in turn may spare the Chancellor’s blushes over the ‘Help to buy’ scheme. Good to know that the economy, rather than politics, remains the Chancellor’s chief concern!

There seems to be little to stop the restriction in the final period exemption – particularly since the legislation is already drawn up so that the period can be reduced if the Treasury so decides. 

Anyone who has more than one residence should be considering their options now, so that they are not caught out when the restriction is introduced. Remember that HMRC insists a nomination must be made within two years of (broadly) a change in the number of residences, so it pays to be up-to-date in any event.