Selling your property in the UK? Beware of the tax traps

A number of legislation changes in recent years mean non-residents are also subject to taxation

Non-UK residents have been subject to capital gains tax when selling residential real estate in the country since 2015. Reuters

Plenty of individuals and companies in the UAE own UK property. Some British residents will have kept their homes when they relocated to the UAE, properties they then rented out full-time or occasionally.  Others may have purchased UK residential or commercial property as an investment.

Despite the unpredictable weather and chaotic politics, there have been solid financial reasons to acquire UK property over the years. UK residential property has generally appreciated, often substantially, over the last three decades or so. The tax position also used to be particularly favourable: the UK was unusual by international standards by not taxing non-residents on their capital gains when they came to sell (although it did still tax “temporary” non-residents).

For example, it used to be the case that if a husband and wife left the UK in 1993 still owning a second UK home that cost them £500,000 (Dh2.2 million) in 1992, and sold it for £3m in March 2015, they would not be liable to UK tax on the sale. And if a UAE commercial investor purchased a City of London skyscraper as an investment in 2010 for £200m, and sold it in 2015 for £300m, the investor would not generally pay UK tax on the £100m gain.

This compared to UK-resident individuals and companies who would potentially be subject to tax of up to 28 per cent (in the case of individuals) and around 19 per cent (for companies) when selling.

Alas, the good times are over for non-UK residents who hold UK property, following a number of changes to tax legislation over recent years. Since 2015, non-UK individuals have in principle been subject to capital gains tax when selling UK residential real estate. In April this year the capital gains tax regime in the UK was extended to the disposal of both commercial and residential properties, including where held through a company rather than directly.

Each sale has to be reported to Her Majesty's Revenue and Customs (HMRC) by the seller, and the tax has to be paid, within 30 days of the sale. Don’t even think about not paying it and assuming no one will find out: revenue authorities across the world have increasingly strong information gathering and enforcement powers, including against other UK assets and potentially assets in other jurisdictions.

Gains are only taxable from the date on which the relevant law was changed. So if the couple who bought the house in 1992 for £500,000 sold it for £4m in 2018, they would be liable to capital gains tax, but only on £1m, being the difference between its £3m value in 2015 and the sale price in 2018.

However, if the couple had returned to the UK in 2017, they would potentially be liable for capital gains tax on the full gain of £3.5m in 2018, generally at 28 per cent - almost £1m in tax. For this reason, it is worthwhile for long-term residents of the UAE taking tax advice regarding their UK real estate. It may be advantageous even to delay their return if necessary – a pleasurable extended holiday in Mauritius could pay for itself many times over.

In relation to residential property, it is possible that a non-UK resident individual may be able to benefit from principal private residence relief (PPR), which would exempt all or part of the gain from capital gains tax. PPR relief will apply in relation to a non-resident in a particular tax year provided that the UK property to be sold qualifies as the seller's “main residence” under both the “tax residency” and “occupation” tests. The UK property will not be regarded as the main residence at any time in their period of ownership which is during a "non-qualifying tax year", namely a tax year where:

• neither the person nor their spouse or civil partner is tax resident in the UK; and

• they have not spent at least 90 days in the UK property in which either the person, spouse or civil partner has an interest .

Any non-resident individual who believes their UK property qualifies as their main residence should make a nomination of such to HMRC within two years of acquiring the second of the two properties, even though, strictly speaking, failing to make a nomination does not prevent a PPR claim being made.

It is certainly worth considering if it is possible to nominate your UK home as your PPR, although you won’t be able to the extent it is let. Spending 90 days or more in a UK property also increases the risk of you becoming UK tax resident in a tax year, which may have a wider UK tax cost.

Domestic tax is complicated; international tax makes domestic tax look easy. Even establishing whether an individual is UK resident or not is tricky (spoiler: at least one person reading this who thinks that they’re tax resident in the UK won’t be and at least 10 people reading this who think that they’re not UK tax resident will be). It’s essential to determine your residency status before determining your tax position on a sale of property.

Given the potential amount of tax at stake, seeking professional advice in advance can be as good an investment as buying UK property has been.

Jeremy Cape is a tax lawyer at Squire Patton Boggs, which has offices in London, Dubai and Abu Dhabi. Follow him on Twitter @jeremydcape