UK: Tax Breaks Reduced For Owners Of Second Homes

Residential property owners need to be aware of some proposed changes, which will have a significant impact on their CGT liabilities.

Final period exemption reduced

If a property has, at any point, qualified as an individual's main residence then the final 36 months would have been covered by relief from CGT, even if the individual did not physically occupy the property in that final period.

Changes to the rules, however, mean that where contract for the sale of a property is exchanged on or after 6 April 2014, the final 36-month period will be reduced to 18 months.

Individuals with multiple private residences and a valid main residence election in place, should review their CGT position.

In a few cases, where an individual is moving into long-term residential care or if they are disabled, the final 36-month period will continue.

Non-UK residents liable for UK CGT

At present, non-UK residents are only liable for UK CGT on the sale of UK business assets. It is proposed, however, that non-UK residents should be required to pay CGT on the sale of UK residential property from April 2015.

Although the exact proposals are yet to be finalised, the Chancellor has advised that the charge will only apply to gains arising from April 2015, which implies that there will be some form of rebasing.

The general principle of double tax treaties is that the country in which the asset is situated has primary taxing rights. The UK will therefore have primary taxing rights on gains from UK residential property and tax credit relief will need to be claimed in the jurisdiction in which the taxpayer is resident for tax purposes.

A sting in the tail is that the current consultation proposes to abolish the right for all taxpayers, including UK residents, to elect their main residence. In future the main residence could be decided based on the quality of occupation or the number of days spent in a property, requiring everyone with more than one home to retain records of occupation. This would be a significant complication for UK residents.

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