RegulationApr 24 2014

Cracks show in new property tax

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      Historically, individuals, companies and trusts not resident in the UK for tax purposes were outside the scope of capital gains tax, with the result that their investment gains were not taxed.

      Since April 2013, personal-use residential properties worth more than £2m owned by certain “non-natural” persons (mainly companies) have been within the scope of the annual tax on enveloped dwellings (ATED)-related CGT charge.

      In his speech to the House of Commons for the 2013 Autumn Statement, George Osborne, chancellor, stated that “from April 2015, we will introduce capital gains tax on future gains made by non-residents who sell residential property here in the UK”.

      A consultation paper was issued on 28 March 2014 on this extension of CGT. The paper takes a high-level view of the intended legislation and reflects that what might be regarded as a simple concept will in fact be extremely complicated to implement. There are a number of significant questions that remain to be answered.

      The chancellor announced the taxation of “future gains”. However, it has not been made clear whether a future gain is all of a gain that arises on a disposal after 2015, or only that part of a gain that accrues after April 2015 – that is, the part that represents an increase in value above the April 2015 value.

      When it was first proposed, the ATED-related CGT charge was to apply to “the total gain accrued during ownership of the property (and not only the gain accrued after implementation of the new charge in April 2013)”. However, following the consultation, a rebasing election was provided for so that ATED-related CGT charges would “apply only to that part of the gain that is accrued on or after 6 April 2013”. This was to avoid the difficulty that would arise in determining historic purchase costs and allowable expenditure. It can only be supposed that the same approach would have to be taken for the new charge, but it is lamentable that this was not made clear in the consultation.

      The new charge to CGT will sit alongside the ATED-related CGT charge, rather than replace it. It seems a curious decision to have two different CGT regimes applying to the same class of assets running in parallel. Indeed, it is likely there will be properties that have fallen within the ATED for part of their ownership period that are subjected to both the ATED-related CGT charge and the non-resident CGT charge on proportions of the gains. This will give rise to a considerable, and perhaps unnecessary, degree of complexity in the tax system.

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