Non-resident owners will be hit by new tax charges on gains from April 2019, and companies will have the relief for inflation frozen from January 2018. Individual landlords have travel expenses simplified with retrospective effect.
Property owners who are not UK residents for tax purposes would normally escape tax on the gains they make on selling UK properties. This is perceived as unfair to UK-based landlords, so from 6 April 2015 non-resident individuals, trusts and close companies have been required to pay non-resident capital gains tax (NRCGT) on the gains they make on selling UK residential property.
No UK tax is payable by an overseas property owner when they sell non-residential (ie “commercial”) property which is located in the UK. This encourages tax avoidance by using offshore structures to hold UK commercial properties.
To block such tax avoidance, and to broaden the UK tax base, gains made on any immovable property will be subject to UK tax from April 2019. This will bring into the NRCGT regime gains from UK residential and commercial property, realised by all types of company, not just by close companies.
The tax charge will also apply to indirect property-related gains, where a property-rich company or entity is sold. This will be defined as one where 75% or more of its gross asset value is represented by UK immovable property. Anti-avoidance rules will apply from 22 November 2017 to stop overseas entities from double taxation treaty-shopping to avoid this charge on property-rich entities.
When an asset is sold for a profit part of the increase in its value will be due to the general rate of inflation. Since April 1982 this inflation-related growth in value has been excluded from the taxable gain by the operation of indexation allowance.
Individuals and trustees had indexation allowance frozen for disposals made on and after 6 April 1998, when taper relief was introduced. When taper relief was replaced by entrepreneurs’ relief from 6 April 2008, indexation allowance was completely removed from the capital gains calculation.
Indexation allowance for companies has continued to apply since 1982, but it will now be frozen from January 2018. This could be the first step towards removing this allowance altogether for companies.
Landlords who hold their properties for the long term within companies benefit from the indexation allowance on the sale of those properties. The gain is first reduced by the effect of inflation over the full period of ownership, as measured by the RPI, then the net gain is taxed at 19%, rather than at 20%, or 28% for gains residential properties. Although an individual can set his annual capital gains exemption worth £11,300 per year, (£11,700 for 2018/19), against the gain before tax is paid.
Individual landlords are treated as running a business for tax purposes but not a trade. The difference is significant for many capital gains and income tax reliefs, which do not apply to businesses but do apply to trades.
Individuals who operate trades can take advantage of fixed rate deductions for use of home and business mileage. Landlords technically cannot use those fixed rates, although an HMRC concession extended the use of the 45p mileage rate (for cars) to landlords before 6 April 2013.
The government has bowed to pressure and will change the law to allow individual landlords to use the fixed rate mileage deductions from 6 April 2017. The use of home fixed rate deduction will not apply. For the period from 2013 to 2017 the landlord should claim the actual mileage expenses and appropriate proportion of capital allowances for the vehicle used for business related journeys.
Corporate landlords, and partnerships with corporate members, will not be permitted to use the fixed rate mileage deductions.