Expats to pay Capital Gains Tax on UK residential property

This information has been prepared by Sykes Anderson LLP as a general guide only and does not constitute advice on any specific matter. We strongly recommend that you seek professional advice before taking action. No liability can be accepted by us for any action taken or not taken as a result of any information or advice given or omitted.

The Chancellor’s announcement that non-resident owners of UK residential property will pay UK CGT on sales after 5th April 2015 will adversely affect UK expatriates who have buy to let investments in the UK. They are an easier target than people who have never lived in the UK as HMRC will have their tax records and they will be registered as a non-resident landlord for income tax on their rental income. Most will own the UK buy to lets in their own names rather than offshore companies which makes taxing them much easier.

It will also affect UK residents considering long term retirement abroad funded partly by buy to let income with the possibility of selling the properties later in retirement. This is because in many countries, although you are theoretically taxed as a resident, there are exemptions based (inter alia) on how long you have owned the property which may mean you pay far less capital gains than in the UK, if anything at all. In short the UK tax changes are likely to cost expats around 28% of their profit on sale of any UK property.

At the moment we are awaiting the UK government’s consultation starting in early 2014 to get some idea of the governments thinking on how the tax will operate. This article concentrates on how the base cost could be computed once the consultation is completed.

There is an existing UK law which taxes people who return to the UK within 5 years though this is not likely to apply to long term retirees.

Base Cost

The big issue is whether there will be a “rebasing” of the base cost to 5th April 2015 values. Many commentators are confident this will be the case, on the basis that it would be unfair to retrospectively tax foreign owners of UK property. In other words and in simple terms if you bought for £300,000 in 1990 and the property is worth £2M in 2015 and you sell in 2016 for £2.5M you would pay capital gains tax on £500,000 not £2.2M. All this seems fair and reasonable for someone who has never lived in the UK and is a “true” foreign investor. It is not so straightforward for UK residents moving abroad.

Policy reasons

The UK government’s policy is to maintain foreign investment in UK property by wealthy non-residents and prevent a sell off. There would be a very quick and damaging sell off if rich foreigners thought there was not going to be a 5th April 2015 base cost revaluation. The same policy thinking does not however apply to UK residents. They are already fully taxable and allowing them to move abroad and get a free base cost uplift is unlikely to be a government priority!

Problem for UK Expats

Applying the automatic base cost uplift to former UK resident is very problematic and has not so far been aired. The cynical UK resident, but “soon to be expat” with a buy to let portfolio, may take the view that waiting for the government’s consultation to end in 2014 is not a prudent move and that it is much better to become non UK resident before 5th April 2014 i.e. in the current 2013/4 tax year to ensure a tax free uplift.

There are the following permutations with the possible outcomes. It must be emphasised at the time of writing this article all this is surmise on the part of the author.

  1. Expat been non-resident for many years
  2. The same rules as for “true” non-residents will probably apply – i.e. base cost of UK properties will be rebased as at 5th April 2015. You will get the free tax uplift. These people are probably best off doing nothing.

  3. Go non-resident in 2013/4 i.e. before 5th April 2014.
  4. UK residents considering moving abroad in the current 2013/4 tax year will probably be in the same tax position as in route 1 above because the legislation will not be drafted or passed by 5th April 2014. There must be a small chance the legislation will be made retrospective as to say 5th December 2013, when the government made the announcement. The new law would then say that people who were UK resident as at 5th December 2013 and then go non-resident and sell a property keep their original base cost. This however seems unlikely because sales in these circumstances will be going through now before the new law comes into force with no tax being paid.

    An issue will be whether you get the automatic base cost uplift if you are resident abroad before 6th April 2014 and then return to the UK after 5th April 2015 without selling the property. This will apply to scenario 1 above as well.

  5. Go non-resident after 5th April 2014 but before 6th April 2015.
  6. Here your departure will probably be after the consultation process is completed and will be in the tax year the new tax law is published. People with buy to lets pregnant with gain may find the new legislation prevents them from going non-resident in the 2014/5 tax year in order to get a free base cost uplift after 5th April 2015. There may be a provision that people leaving the UK after 5th April 2014 keep their original base cost. It seems too obvious a move for UK residents to get the free base cost uplift by moving out just before 6th April 2015.

  7. Go non-resident after 5th April 2015
  8. It seems very unlikely that the government will allow people to claim a 5th April 2015 base cost uplift on their existing buy to lets. If they did so there would be a strong incentive for UK residents with long term buy to lets to move abroad and then sell. Most people who did this and sold in 2015/6 would pay no UK Capital Gains tax as they would claim there was no gain from 5th April 2015.

Practical Advice

If you have long term residential buy to lets which are pregnant with gain, which you want to keep, and were thinking about retiring abroad it is worth considering making the move before 5th April 2014. This is a “stab in the dark” but it is more likely you will be classed with existing long term non-resident investors and get a base cost uplift, than with UK residents seeking to avoid UK capital gains tax.

16th December 2013

David Anderson
Solicitor Advocate and Chartered Tax Adviser
Sykes Anderson LLP
9 Devonshire Square
London EC2M 4YF
Telephone 020 3178 3770