Non-Resident Landlords – Capital Gains Tax
The capital gains tax scheme for Non-Resident Landlords has a different basis than the income tax scheme. This is only relevant if you are Non-Resident for tax purposes under the statutory residence tests.
The rules state that if you sell your UK property then you must make a capital gains tax return (https://www.tax.service.gov.uk/shortforms/form/NRCGT_Return) within 30 days of the completion of the sale, even if there is no tax due.
Late filing attracts the following penalties:
- £100 for up to 6 months late
- £300 or 5% of any tax due (whichever is greater) for more than 6 months late
- £300 or 5% of any tax due (whichever is greater) for more than 12 months late
If you are registered for self-assessment tax then you don’t have to pay the tax until 31st January following the end of the tax year when the sale was made. If you are not registered for self-assessment, then you have 30 days to pay the tax. Interest is charged on the late payment. You could therefore have the situation where joint owners have different CGT payment dates, depending on their situation.
If you sold your flat on 31st December, 2017 and had no capital gains tax liability, and you didn’t report the sale until you spoke to your accountant when completing your annual self assessment tax return (due 31st January, 2019) you would have penalties of £700 – even though there is no tax to pay!
According to HMRC 1 in 3 returns are late and most tax payers are simply unaware of the filing obligation, unfortunately this is rarely an acceptable excuse for HMRC when they are imposing penalties.
The rules regarding Capital Gains Tax only came in to effect from 5th April, 2015 and therefore any sales should use the rebasing value at 5th April, 2015 as the base cost (unless this value at 5th April, 2015 was less than the actual cost paid – in which case you should elect to use the retrospective cost).
- Mr Baracus purchased a property in the UK January 2009 for £145,000. The value of the property at April 2015 was £185,000. He sold it in April 2018 for £200,000. He is non-resident for UK tax purposes therefore he has 30 days to notify HMRC of the sale and any gain.
Normally his gain would be calculated by deducting the cost from the sales price (less any other expenses in relation to the purchase and sale of the property stamp duty, legal costs, estate agents fees etc) – £55,000 in this instance. However, as the CGT rules changed in April 2015 he rebases the property cost to the April 2015 value of £185,000 thereby reducing the gain to £15,000.
When calculating the tax on the gain then each person has to consider their annual exemption (currently £11,700 for 2018/19) and whether or not they qualify for PPR relief (Principal Private Residence). PPR relief means that gains accumulated during the period that you lived in the property are exempt from Capital Gains Tax. In addition, the last 18 months are also treated as if they qualify for PPR (even if they lived in the property pre-April 2015 if non-UK resident).
- Mr Hannibal was in a similar situation to Mr Baracus except he was a UK resident and lived in the property from January 2009 until January 2014 then let the property out before selling it. His gain of £55,000 would therefore be apportioned to account for his PPR relief.
- Length of ownership – 112 months (January 2009 – April 2018)
- PPR – 78 months ( 60 months whilst living there + last 18 months qualify)
- Gain of £55,000 x 78/112 = £38,304 exempt and £16,696 taxable
- Less annual exemption of £11,700 = taxable amount of £4,996
In this instance Mr Hannibal would also qualify for letting exemption (whereby the gain for the apportionment of the rental period is less than £40,000 then no capital gains tax is payable).
- Mr Murdock had a similar property under the same circumstance, except that in January 2014 Mr Murdock moved abroad. Under the NRL CGT rules the calculation is as follows:
- CGT payable under NRL rules with rebasing cost = £15,000 for the period April 2015 to April 2018 (37 months)
- PPR relief available for 18 months
- Capital gains tax = £15,000 x 18/37 = £7,297 exempt from CGT
- Taxable gain = £7,703 less annual exemption £11,700 – no CGT payable
If there was a taxable capital gain then the tax would be payable at 18% or 28% depending on whether or not they are a basic or higher rate tax payer.
We hope that helps!
This blog was written by Stuart Clark at Russell & Russell, a firm of proactive accountants who utilise the latest technology to assist their clients to take home more of what they earn and to understand their numbers. If you would like to find out more about their services contact Stuart Clark.