UK introducing capital gains tax on property sales by non-residents

Q&A: Dominic Coyle

I own a property in the UK but reside here. I was recently alerted by a headline, "Non-residents to pay capital gains tax on UK house sales". I quote from the article: "From April 2015, homeowners who are non-resident in the UK for tax purposes will become liable for capital gains tax on any increase in property values after that date." Could this mean capital gains on the increase in value from the point of purchase or from April 2015? Also, could this mean a double capital gains tax in the UK and here, which would obviously be hefty?

Mr GL, Cork

You’re quite right that the UK authorities intend to start taxing gains from next year. It appears you are going to pay the price for the sudden influx of foreign buyers to the UK, which has been pushing up prices in certain areas, particularly in London.

By some estimates, as much as 70 per cent of new homes in central London were snapped up by foreigners in the 12 months to June last year, including 30 per cent of the city's luxury homes – those valued in excess of £1 million. I'm not suggesting you are part of this new influx but it appears that Britain's coalition government was startled into action by the sheer scale of non-resident buyers and the growing belief that they were distorting the market.

Your query is timely because, despite our recession and the years of austerity, there are a significant number of Irish residents holding property in the UK.

The first and most critical point is: what is going to be taxed? My understanding is that only the increase in value after April 6th next will be subject to capital gains tax under the new regime.

The UK government did issue a consultation paper on the proposed mechanism for the new tax, but has not yet announced the outcome of that process. Sources suggest it could be the end of the year before a definitive structure on how the new tax will operate is set down. However, the consultation paper did give clear insight into the thinking of the government in London.

This paper, Implementing a capital gains tax charge on non-residents: Consultation, published jointly by the treasury and the UK Revenue, can be found at http://iti.ms/ 1yvOHn3. The consultation period concluded in June.

First, the tax will apply on sales after April 6th next – the start of the new tax year in the UK. Tax will apply on gains made after that date, so any increase in value between the time you bought the property and April 5th, 2015 will not be taken into account.

Quite how they intend to sort out the valuations on that precise date in not clear. It is proposed that the level of tax charged will mirror the capital gains tax regime for UK residents. This means that people will pay either 18 per cent or 28 per cent on the gains, depending on the level of their UK income and gains, though again that remains to be confirmed.

The annual exemption now available to UK residents will also apply to non-residents selling UK property, according to the document. This means you will be able to discount the first £10,900 of gains before calculating the amount owing under the new regime.

It is proposed also that Private Residence Relief available to UK residents (to take account of time they lived in the property and reduce any capital gains exposure), will be available to non-residents who have similarly lived in the property for a time . This would include those who emigrate from the UK and later sell what would have been their main home.

DOUBLE TAXATION

On the second point you raise, while it has not yet been expressly stated how the new arrangement will be treated, there is an existing double taxation agreement between Ireland and the UK which dates back to 1976.

Among other things, this deals with the issue of capital gains. While non-residents would not thus far have been liable to capital gains tax on the sale of UK property, it seems to me that the provisions of the agreement are sufficiently broad to cover it.

They provide, among other things, that “gains derived by a resident of a contracting state from the alienation of immovable property situated in the other contracting state may be taxed in that other State”.

You can see why only lawyers and accountants love contracts. To the ordinary person, that phrase is designed to confuse. I believe it means that if you sell “immovable property” – which a house or apartment clearly would be – it can be taxed in the country where it is located, regardless of where you are resident.

Of course, Irish tax residents are also liable to tax on worldwide income and gains from the sale of assets. What happens, in effect, is that the Irish Revenue will give you a credit for any capital gains tax paid elsewhere.

Thus, in this case, Irish capital gains tax is 33 per cent on any gain made in a given tax year over and above the €1,270 annual exemption. But the Irish tax officials will deduct whatever you have already paid the UK tax authorities before determining your ultimate liability to Irish tax.

WORKING IT OUT

Let’s say, you have a property valued on April 6th next at £100,000. Two years later, you sell it at £120,000.

You will, of course, be able to deduct costs incurred in selling the property from the gain, but leave that to one side for the moment. As I understand it, you would first take the CGT exemption of £10,900 from your £20,000 gain. The UK will then tax the balance at either 18 per cent or 28 per cent depending on your total UK income – a UK tax bill of £1,638 or £2,548.

From the point of view of the Irish tax authorities, your £20,000 gain comes to €25,615 at current rates. Allowing for the annual CGT exemption over here of €1,270, the balance of €24,345 is liable to tax at 33 per cent – a total of just over €8,033.

The Irish tax authorities will deduct from that liability the £1,638/£2,548 (€2,097.50/ €3,262.75) paid in the UK, which would leave you with an outstanding bill of €5,936.35 or €4,771.10.

Send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara St, D2, or email dcoyle@irishtimes.com. This column is a reader service and is not intended to replace professional advice.