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Changes to capital gains tax and residential property

by Tax Faculty Team on 05.12.2013 14:57

Increasing the tax take on the sale of residential properties by non-residents and residents 

Today’s Autumn Statement contained two announcements about capital gains tax (CGT) on sales of residential property: 

  • Non-residents are to pay tax on the sale of UK residential properties
  • The final period of relief for a private residence is reduced from 36 months to 18 months. 

Non-residents and UK properties

We had predicted that CGT will be charged on future gains realised by non-residents on the sale of their residential property in the UK. It has long been an anomaly that a non-resident pays no CGT on UK-situs assets; generally the country in which property is sited has the taxing rights on any gain realised on disposal. 

A consultation document will be published on how best to introduce this change in early 2014. The wording of the Chancellor’s speech indicates that it is just future gains that will be taxed and not historical gains; this would consistent with the CGT charge introduced for residential properties owned by companies and other entities within the scope of Annual Tax on Enveloped Dwellings (ATED). 

Private residence relief – final period

The second change on the taxation on the sale of residential dwellings applies to everyone, not just non-residents. The Chancellor announced a reduction in the final period of ownership qualifying for relief from 36 months to 18 months from 6 April 2014. 

This grace period is allowed to help home owners unable to sell their old home having bought a new one, so that the gain remains exempt from tax even though they have moved out. When the measure was first introduced the grace period was just 12 months, increased to 24 months from 1980 and 36 months from 1991. The period was extended to 36 months when the housing market was flat and home owners were struggling to sell their property within the grace period allowed previously. Though even now, while it may be easy to sell a property in the south within 18 months the lead time is often considerably longer the further north the property lies. 

The 36-month exempt period is often used to reduce the CGT on the sale of a second home where an election is in place as to which home is the principal private residence. At may well be this planning that is being targeted by the Chancellor.