Private Residence Relief changes for non residents – are you ready?

Chris Street

9th October 2016

Louise, one of my property tax experts at Optimise Accountants, emailed me this week with information on Private Residence Relief, and the potential impact on one of our clients.

The details highlighted by Louise are so pertinent and relevant for our buy-to-let property investor clients, that I wanted to highlight Louise’s example with our property investment blog readers. The basic details about the actual client have been slightly altered in terms of location to protect her identity. Over to Louise:

“I wanted to share information about a client activity I’m conducting at the moment. She had been resident in the UK and has built up a UK property portfolio. In the 2015/16 tax year she moved to Canada. In 2016/17, she sold one of her rental properties here in the UK, and asked me what she needed to do.

As a buy-to-let property investor, it’s important to remember that a 30-day clock starts ticking with regard to getting information into HMRC from the date of legal conveyance where the seller is non-resident in the UK.

What exactly does ‘conveyance’ mean?

To a property tax expert, ‘conveyance’ is the date that contracts are signed and exchanged – also sometimes called ‘Exchange’.

Conveyance is therefore not completion, and exchange occurs always before can be up to a couple of weeks in advance. That means that if a client is on the ball and tells you they’ve sold a property it’s likely they are referring to completion – and it means at least 14 days of that 30-day property tax window has already been eaten into.

As a non-resident, there is a HMRC non-resident capital gains form that must be completed for each and every capital asset sale in the year. It’s online – and we as the agent of the client can complete it for you.

It needs you, however, to work out the capital gains tax now due.

It also (crucially) asks when the seller would like to pay the CGT due. You can pick within 30 days of conveyance or at the next self-assessment tax return deadline. If the property was sold in the 2016/17 tax year, the client will have the option to pay as part of the 16/17 tax year review and therefore the deadline for payment of  CGT  is 31 January 2018.

However, the client has to pay within 30 days of conveyance if the client don’t already do self assessment, and do not have a UTR code for themselves.

How do you calculate when capital gains tax is due?

And in terms of calculating the CGT due – if they are non-resident when they sell the property, then CGT is payable on the profit made between the period 06 April 2015 and the date of sale.

This means that if a seller owned the property from earlier than this date, they need to work out the proportionate split of profit they made from 06 April 2015 to the date of completion, and use this to work out if there is any CGT.

This can be tricky because non of us have a time machine to go back to 05 April 2015, instruct a valuer to value the property as of this date and then jump forward again to present day.

How do you value the gain in the period HMRC are interested in?

HMRC allow you to use one of three methods:

1.  A valuation as of 05 April 2015.

2.  Forget the valuation and pay CGT on the full value.

3.  A straight line apportionment method.

It’s this third option that I believe we will use most often for our property investment clients.  If you’ve ever calculated PRR or Lettings Relief for a client the method below won’t be a surprise:

Let’s say a client has sold a property that they owned for eight years, or 96 months. They ‘completed’ today.

That means the total number of months they owned it after 05 April 2015 is 18 months. I’m simplifying by including the first part of April 2015 for ease.

This means that if they had a capital gain after taking off all costs of buying, improving and selling, 18/96ths of that gain would be subject to capital gains tax.

Does a client who is non-resident get a capital gains tax allowance?

The answer is yes.

And I’ve checked this with the technical team of HMRC today. In short, if you sell an asset in the UK and it is subject to capital gains tax you automatically get the capital gains tax allowance.

It doesn’t matter whether or not you are a UK , European or any other citizen. For many non-resident clients of ours, therefore, particularly those who are considering selling parts of their UK portfolio, it may be worth doing it sooner than later.

If the gain for the period after 05 April 2015 to the date of sale remains less than £11,100 then they won’t pay any CGT.

The critical thing for buy-to-let property investors to remember is that if they move back to the UK and become a resident within five years of the tax year in which they sell the asset, the CGT will have to be recalculated to include all of the gain.

To reduce your CGT as a non-resident, remember this

  • A non-UK resident who will remain a non-UK resident for at least six years after sale
  • Sell a CGT-able asset
  • The only CGT due is on the gain made after 05 April 2015 to sale date
  • This can be calculated using the HMRC ‘Straight Line Model’ if a valuation was not done on 5th April 2015 to rely upon
  • You must tell HMRC about the sale and the gain within 30 days of Conveyance which is exchanged and not completed
  • If the gain calculated is covered by the capital gains tax allowance present in that year of sale, then there is no CGT to pay

Furthermore, your location in the world does not affect the PRR you can secure, assuming that at some point you had lived in the house as your main residence.

Finally, the online HMRC form allows you to input information regarding tax relief too so that another clear sign that being overseas doesn’t prevent you from relying on the reliefs over-and-above capital gains tax allowance.”

For further information on Private Residence Relief, please visit here.

To find out more about Private Residence Relief changes could affect your property portfolio, and how our team of expert property tax accountants including Louise can advise further on allowable costs to offset against property income, please feel free to get in touch below.

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