Capital Gains Tax (CGT) has been extended to non-UK residents and British expats working overseas

British expats and people with foreign holiday homes must take stock to deal with the new tax regime that came into force this month.

Capital Gains Tax (CGT) has been extended to non-UK residents selling UK residential property and as the tax will be calculated on the gain made after 5th April 2015, owners need to record the value of the property and its general condition now, so they have best evidence for dealing with the tax when they eventually sell. The HMRC is likely to challenge any valuation considered unrealistic and a real-time valuation by a professional is likely to present a stronger case to HM Revenue & Customs than an estimate made historically when the property is actually sold.

The changes are designed to close the loophole that benefited non-residents making a gain on the sale of a UK property where it was not their main home and whilst the headline was about tackling the wealthy investors in the UK property market, it’s also affecting British expats working overseas.

Until now, CGT on such gains was paid only by people resident in the UK, but now those based overseas will be treated in the same way. Individuals will have the same CGT annual exemption, which is £11,100 in 2015/16, and be taxed at the same rate, 18% or 28% depending on the individual’s UK income and the amount of any gain on disposal of the property.

The April 2015 valuation is important as the tax will only apply to gains made above the market value at the time the new rules came into force. The alternative option for calculating any gain is that owners can choose to use the original cost of buying the property and then time-apportion from that figure.

The other change tied to the new regime relates to the principal residence relief (PPR) rules, which now apply to non-residents disposing of a UK property and also to UK residents disposing of a property abroad. Now, a property will not be eligible to be counted as the principal residence, and therefore free of CGT, unless either the person making the disposal was resident for tax purposes in the same country as the property for that tax year, or the person spent at least 90 overnight stays in the property, and the overnight stays must be fully documented so evidence can be shown to HMRC.

The impact for owners of holiday homes abroad is that they can no longer qualify for PPR on their foreign home or be able to elect for that property to qualify for PPR, unless they spend at least 90 days there in any tax year. And for those who had planned to make a more permanent move abroad and become non-resident, the new NRCGT means they are likely to have a CGT bill when they sell their UK property, possibly without the benefit of full PPR.

Sabrina Bruce, IBB’s Trusts and Tax Adviser commented: “The 90-day stay can be split between spouses if they are joint owners of a property, but it’s likely to be difficult for anyone to achieve the qualification criteria unless they are semi-retired or able to work flexibly. Equally important is the impact on letting out property – if an owner needs to spend 90 days in the property, it is likely to put a stop to long term letting.

“Certainly the changes are going to have a big impact on future planning for both UK expats living abroad and UK residents with holiday homes overseas, although expats who have had a spell overseas as a work requirement will still be able to claim PPR relief if they return to live in the UK in what was their main UK property. There may be other options, such as setting up a trust but that’s something that needs professional advice and is very much dependent on personal circumstances. For now, the important thing is to make sure you’ve taken stock and have valuations in hand and systems in place to record time spent in the property.”

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