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Selling residential property for non-residents

It is more than two years since HMRC brought in a new tax regime for non-residents who dispose of residential property in the UK.

But until recently, almost a third of receipts from the new capital gains tax liability were coming from penalties for late returns, largely because so many taxpayers and advisers were unaware of the changes.

In June, the Chartered Institute of Taxation (CIOT) reported that HMRC had suspended its £10 a day penalties for returns between three and six months late, which could trigger a £900 bill for a return where no tax was actually due.

Taxpayer pressure forced a retreat from what was widely seen as an under-publicised and unfair measure. The Chartered Institute says its concern was not only about HMRC’s approach to penalties but “the lack of targeted publicity about the measure itself”.

HMRC says: “Following representations from a number of customers and agents HMRC have reviewed its position with regard to the £10 daily penalties. I can confirm that we no longer issue these penalties for late non-resident Capital Gains Tax (NRCGT) returns and past penalties will be withdrawn.”

Prior to 6 April 2015, non-residents escaped capital gains tax on UK residential property sales. But at a time when UK residents were facing hefty new tax bills on buying second homes to help boost property tax receipts, the government decided to target non-residents too and bring the UK into line with many other countries.

“Trying to collect tax from non-residents is always going to be a challenge, which is presumably why a 30-day reporting deadline was introduced,” says CIOT. “Originally all non-residents with a gain were going to have to pay the tax within the same 30-day period, but following representations by CIOT and others, this was changed and only those not in the self-assessment system have to pay within 30 days.”

However even those in self-assessment must file a NRCGT return within 30 days, then defer payment until the normal 31 January deadline.

The NRCGT return is subject to the FA2009 Sch55 penalty regime which means that penalties can be imposed even where there is no tax payable, subject to an exception for no gain/no loss disposals for intra-spouse transfers and corporate group members which was introduced in 2016.

The late filing penalties start at £100 for missing the 30-day deadline, rising to £300 or 5% of the tax due whichever is the greater after six months and again after 12 months. So a return overlooked for a year where no tax is due would still mean a £700 penalty.

Until recently, HMRC was demanding up to another £900, on a £10 a day tariff for returns between three and six months overdue.

Paying late triggers another round of penalties, with 5% of the tax due at the time payable after 30 days, again after six months, and again after a year.

According to CIOT, in many countries where CGT is charged on non-residents selling property, there is a legal requirement to use a registered legal representative. So a notaire in France sells the property, makes the capital gains notification, and retains a percentage of the proceeds to pay the tax. In the UK there is no such requirement, so there does not have to be a third party fully aware of the legal reporting requirements involved in the sale.

One expatriate blogged, before HMRC suspended its daily penalties: “We had no idea the form existed when we sold our UK property in September 2015. We have both lived in Australia for five years and we had no gain on the sale. We got hit with a £1300 fine each as we were joint owners of the property. We did return the details on our 2016 tax return. Our UK solicitor did not mention anything to us at the time.”

An adviser responded: “The system is hopeless. I've got appeals in for late returns for the most honest taxpayers imaginable, who got me the information with their normal SA paperwork, £nil tax payable but £3,200 penalties for late returns.” He went on: “The clients don't know about it. The conveyancing solicitors don't know about it. The estate agents don't know about it. Most accountants I speak to don't know about it. And then regardless of whether any tax is payable, large penalties ensue. If you're going to have a mandatory 30 day return on a transaction then the only hope for enforcement is to put a requirement to withhold tax / make that return on the solicitors dealing with the conveyance.”

Advisers have also noted that the legal position is unchanged - HMRC is choosing not to levy the penalties, but it retains the right to do so – and that the problems will be compounded if Making Tax Digital is applied to unincorporated landlords.

The tax itself also applies to non-resident trustees, companies or funds, and individuals in a partnership, as well as personal representatives of non-residents who have died and UK residents meeting split year conditions where the disposal is made in the overseas part of the tax year.

It does not apply to disposing of a main home unless it is very large or has been let out, used for business, or been unoccupied for long periods. However even where there is no liability the NRCGT return still needs to be completed within the 30 day deadline.

Published: 15 August 2017

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August 2017

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Liz Beadsley