GUEST COMMENT: The Party's Over For Some Non-UK Holders Of British Property

Andrew Goldstone

Mishcon de Reya

5 January 2015

Andrew Goldstone, partner and head of tax at international law firm Mishcon de Reya talks about changes to capital gains tax treatment of non-UK residents owning UK property.

The UK government's long-awaited final proposals for capital gains tax on non-UK residents owning UK residential property have now been published. The government believes that capital gains tax should apply to disposals of UK residential property by residents and non-residents alike. The government states that it is “rectifying the unfairness in the system that currently allows non-residents to escape UK capital gains tax on disposals of UK property that are or could be used as a dwelling house”.

The plans for the new capital gains tax charge were first announced in the 2013 Autumn Statement and a consultation document followed in March 2014. Mishcon de Reya, in common with a number of law firms, responded to the consultation document and took part in working groups with HM Treasury and HM Revenue & Customs through the early summer of 2014 to discuss the proposals. The changes will be enacted through the Finance Act 2015, a draft of which was released on 10 December 2014.

From April 2015, non-UK residents who own a house or flat in the UK will have to pay capital gains tax when they sell it. However, to avoid unlawful discrimination against foreign property owners, if the property has been their main residence they can still claim exemption from tax in the same way that UK residents can. And under the current rules, UK residents can choose which of their homes they want to be treated as their main residence for the purpose of the CGT exemption. So if their actual main residence is a house in the country and their second home is a far more valuable but only occasionally-used London flat, they can elect for the London flat to be their main residence. Think MPs and the so called "flipping scandal".

The problem faced by the government is that if the same choice is given to non-residents who own a holiday home here and other properties in their home country, they would simply elect for their UK property to be treated as their main residence. They would then get full tax exemption on the sale of the UK property whilst paying no UK tax on the sale of their actual main residence in their home country. As a result, the government would raise almost no revenue from its new tax on non-residents.

To deal with this, the government is also changing the rules on when the capital gains tax main residence exemption can be claimed. A new “90-day rule” has been included in the recently published Finance Bill. This says that a property owner can only claim the exemption for a property in a particular tax year if they are either resident in the country where the property is located or they spend 90 days in the property during the relevant tax year. But this condition is not without its problems.

In order to qualify as spending a “day” in the UK property, the government has decided that an individual must be in the property “at the end of the day”. That is not a defined term and is open to interpretation. Does it mean sunset, or when you go to bed, or midnight? A recent government publication issued a few days before the Finance Bill indicated that an individual will have to be in the property at midnight, suggesting that this is likely to be the relevant test. That would at least be consistent with the statutory residence test . Being in the UK at midnight is already a requirement when counting how many days a person has spent in the UK for the purposes of determining their tax residence status under the statutory residence test.

The tests are, of course, very different. A midnight test makes sense when deciding if someone is in the UK on a particular day since they can be anywhere in the country and still meet the test. But a midnight test based on being in a particular property at midnight is a different matter. It is unduly restrictive and probably unenforceable.

Many of the foreign clients who own a home in London and spend the summer here will be desperate to meet the 90-day test. If that actually means 90 midnights then what we effectively have is a curfew. We may find the nightclubs of Mayfair and Knightsbridge will suddenly empty out as foreign Cinderellas rush home before the clock strikes twelve. That said, the real party animals will be unaffected as their nights out only start after midnight.