UK Capital Gains Tax for Expats and Non-Residents in 2023/24 (and Earlier)
As of April 7, 2023, this article delves into the intricacies of UK Capital Gains Tax and how it impacts individuals who are not UK residents. Capital Gains Tax (CGT) in the UK is a tax applied to the profits generated from the sale or disposal of assets.
The calculation of the total gain involves subtracting the sale value from the original purchase value. For instance, in the case of selling a residential property, the sale value typically equates to the sale price, or in certain situations, the market value that the property could reasonably attain in an open market. Market value is relevant when gifting a property, selling it at a reduced price, or transferring it to a connected person, such as a family member. For assets acquired before March 31, 1982, the market value as of that date is considered.
It is also possible to deduct costs associated with property improvements during ownership, including advisory expenses, general improvements (excluding decoration or maintenance), and other legal and professional fees.
Once the total gain is determined, tax relief and tax-free allowances are factored in before computing the Capital Gains Tax liability at the appropriate rate.
For non-domiciled foreign nationals, often referred to as expats, residing in the UK, it is advisable to review our guide on UK tax obligations for “non-doms” in the UK.
Understanding the 5-Year Rule for UK Capital Gains Tax for Expats and Non-Residents
Previously, simply leaving the UK for an entire tax year and then disposing of profitable assets (though different rules applied to property) during that year could exempt you from Capital Gains Tax. However, one year is no longer sufficient; individuals must now be non-residents for a minimum of five complete UK tax years to utilize this rule. Precise timing is crucial, as it can significantly affect your tax liability.
Even if you are considered non-resident for income tax purposes, you are treated as temporarily non-resident for capital gains tax purposes for up to 5 years. Certain gains made during this period are taxed when you return to the UK within five years.
However, assets like portfolio investments acquired after leaving the UK are not subject to UK Capital Gains Tax if you are indeed a non-UK resident. Additionally, considering double taxation agreements, capital gains may be entirely exempt from UK tax but subject to taxation in your country of residence.
Assets Subject to UK Capital Gains Tax
Assets liable for Capital Gains Tax encompass all types of property (unless explicitly exempted), certain gifts, assets inherited and subsequently sold, shares, and assets transferred due to divorce or dissolution of civil partnerships.
UK Capital Gains Tax Rates
In the UK, Capital Gains Tax for residential property incurs a rate of 28% when total taxable gains and income surpass the income tax basic rate band. Below this threshold, the rate is 18%. For trustees and personal representatives of deceased individuals, the rate is 28%. Non-residential property and other assets are subject to rates of 10% and 20% for individuals, respectively.
For those selling non-publicly listed businesses, there may be an opportunity to benefit from the equivalent Entrepreneurs’ Relief scheme, resulting in a 10% tax rate on the sale of a business or business shares. However, this has undergone recent changes and is discussed separately.
Capital Gains Tax Relief
Several tax reliefs can reduce the chargeable gain, including:
1. Rollover/Holdover Relief: Allows for the deferral of CGT on a business asset’s gain when replaced with a new business asset within a specified timeframe.
2. Business Incorporation Relief: Available when transferring a business into a Limited Company in exchange for shares.
3. Holdover Gift Relief: Applicable to certain gifts of business assets or gifts into trusts, deferring tax until the recipient disposes of the gift.
4. Entrepreneurs’ Relief: Reduces the CGT rate to 10% for business disposals after April 5, 2008, with a lifetime limit of £1 million (as of April 6, 2020).
Absorption of Capital Losses
Capital losses from a chargeable transaction can offset capital gains in the same tax year. These losses are applied before the annual exemption and can be carried forward against future capital gains, but not typically carried back. To utilize a capital loss, it must be reported to HMRC within five years and ten months of the tax year’s end in which it occurred.
Capital Gains Tax Allowance
An annual exemption of £6,000 applies for the tax year 2023/24, allowing individuals to exempt gains up to this amount. Any unused annual exemption cannot be carried forward or transferred.
Previous years’ capital gains tax allowances include:
– 2022/23: £12,300
– 2021/22: £12,300
– 2020/21: £12,300
– 2019/20: £12,000
– 2018/19: £11,700
– 2017/18: £11,300
– 2016/17: £11,100
– 2015/16: £11,100
– 2014/15: £11,000
Other Capital Gains Tax Exemptions
Various exemptions apply to specific situations, including the sale of one’s primary residence (though partial charges can arise in certain cases), transfers between spouses or civil partners, certain depreciating assets, and more.
Capital Gains Tax Rules for British Expats and Non-UK Residents with UK Property
Effective April 6, 2015, a rule significantly impacts British expats and non-UK residents with UK property, particularly those with buy-to-let arrangements that generate annual income.
While you can be assessed for CGT on the original property value, you have the option to assess the gain based on the property’s market value on April 5, 2015, if you owned it before that date. Therefore, CGT is calculated using the property’s value on the day prior to the introduction of the new tax rule for non-residents at the beginning of the 2015/16 tax year.
For accuracy, it’s recommended to seek professional advice regarding the property’s value as of April 5, 2015, to determine the gain or loss from that date to the sale date.
UK Capital Gains Tax Payment Timeline
Since October 27, 2021, individuals selling residential properties must pay the full amount owed within 60 days from the sale’s completion, an extension from the previous 30-day timeline introduced in April 2020.
For those selling a property that was once their primary residence, tax relief applies for the time they lived in the property throughout the ownership period.
For non-UK residents selling UK property, it’s possible to have the chargeable gain assessed based on the property’s market value on April 5, 2015. However, tax relief is available for only nine months of the total ownership period from April 6, 2015, to the sale date if the property was once the main residence. (Before April 6, 2015, non-UK residents were not subject to CGT on UK property disposals, discussed in greater detail below.)
If you’re unsure about how these changes directly affect you, it’s essential to
seek professional assistance from a specialist in non-resident tax matters. We can connect you with a tax specialist from our network to ensure accurate tax payments and declarations.
Capital Gains Tax Declarations for Non-Residents Selling Property
Since April 2015, non-residents are required to inform HMRC when selling a UK residential property, even if no capital gains tax is due. This obligation also applies to the sale of one’s primary residence. Failure to make a correct capital gains tax declaration to HMRC within 30 days after property conveyancing may result in penalties, even if no capital gains tax is payable.
It is strongly recommended to seek professional advice before finalizing any declaration or capital gains tax calculation.
Purchasing UK property involves numerous considerations. Our International Private Client Advisory team, in partnership with Birketts Lawyers, specialises in guiding clients through these complexities and finding the optimal ownership structure for their needs. Contact us today to embark on a successful and tax-efficient property investment journey.