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AVOIDING A CAPITAL GAINS TAX MINEFIELD FOR NON-RESIDENTS

First published 5th January 2017; Updated 15th November 2018

It has come to our attention that some non-resident clients are making transfers of the ownership of their UK property (often within the family) without asking us first. This can lead to some very large tax bills even where no money is paid.

IF YOU ARE THINKING OF TRANSFERRING A PROPERTY IT IS VITAL THAT YOU CONTACT US FIRST

As you know, a sale for full value is subject to tax on the gain, usually on the uplift in value since 5th April 2015 or later if you bought it after that date.

BUT WHAT IF YOU GIVE AWAY THE PROPERTY OR PART OF THE PROPERTY?

When you make a gift of part or all of a property there is a “disposal”. Disposals are subject to Capital Gains Tax in the UK whether money is paid for the property or not. Most commonly this occurs when you transfer part or all of the ownership of a property to a family member without receiving any payment, though it can also apply when the payment you receive is less than market value.

Whenever there are disposals where the aggregate proceeds or value exceeds £45,200 or the aggregate gain exceeds £11,300 you must report it to HMRC and pay any tax due.

THERE ARE TWO PROBLEM AREAS

1

Transfers between husband and wife are treated as creating no gain and no loss for UK tax purposes. However if the first owner purchased the property a long time before 5th April 2015 and the transfer occurs after 5th April 2015 the transfer may create a huge tax liability.

Example 1

George is not resident in the UK. He purchased a property in 2000 for £100,000. In April 2015 it was worth £750,000 and he sells it in March 2017 for £800,000. He will pay Capital Gains Tax on £50,000 (the increase in value since April 2015).

Example 2

John is also not resident in the UK. He purchased a property in 2000 for £100,000. In April 2015 it was worth £750,000 and he gave 50% ownership to his wife in March 2016.  In March 2017 they sell the property for  £800,000. He will pay Capital Gains Tax on £25,000 (the increase in value of his 50% share since April 2015). She will pay Capital Gains Tax on £350,000 being the uplift in value of her half share since the property was first purchased by John. She cannot use the 5th April 2015 value as her base cost as she did not own it then.

2

Gifts and sales below market value that are not from husband to wife (or wife to husband) are also disposals that may be subject to Capital Gains Tax. However an election may be made by both parties which has the effect of deferring the tax until the disposal of the property by the recipient.

Example

In March 2017 Mary transfers 50% of the ownership of her rental property in London to her daughter. Mary is non-resident and bought the property many years ago for £100,000. At the 5th April 2015 the value of the property was £750,000 and at the date of transfer it was £800,000. Mary and her daughter have two choices:

Choice a)

Mary can pay the Capital Gains Tax now on £25,000 being the uplift in value of the 50% share between 5th April 2015 and the date of transfer OR

Choice b)

Mary and her daughter can elect to defer the tax. However when Mary’s daughter comes to sell her 50% share she will be taxed on £350,000 being the uplift in value of the 50% share since the property was first purchased by Mary.

STUDENT ACCOMMODATION

Student accommodation generally does not count as residential accommodation.

With effect from 5th April 2019 gains accruing after that date on disposals of other assets by non-residents will also be subject to Capital Gains Tax.

Example

John has been resident outside the UK for more than five full UK tax years. On 6th April 2020 he sells an apartment and a student accommodation unit. The apartment sells for £400,000 and the student accommodation unit sells for £200,000. He bought both in April 2014 for £200,000 and £100,000 respectively. The value of the apartment at 5th April 2015 was £300,000 and the value of the student accommodation on 5th April 2019 was £175,000.

The taxable gain in 2020-21 will be £100,000 (apartment ) +£25,000 student accommodation.