Autumn Statement 2013: bad news for second home-owners

5 December 2013

Headlines from Chancellor George Osborne's Autumn Statement have focused on foreign property owners paying their fair share of capital gains tax when they sell up. But it will be UK taxpayers who end up bearing the brunt of the new rules, and one year earlier than overseas buyers.

The Treasury expects to net an extra £360 million in CGT from UK-domiciled homeowners over the next six years, compared with £125 million from non-resident homeowners who sell their properties, figures from the Chancellor's Autumn Statement reveal.

UK-domiciled taxpayers will swell the Treasury coffers by an extra £65 million in 2015/16, followed by £90 million, £100 million and £105 million in each subsequent year. The Treasury does not expect to collect extra CGT from non-residents until 2016.

It plans to achieve this by amending the rules that govern election of a person's principal private residence (PPR). The PPR is exempt from CGT. It works on a time-apportioned basis, in which there are periods of deemed residence available. The final period has been cut by the Chancellor from three years to 18 months.

The new rules will catch out a wide range of property owners.

"People affected will be anybody who has more than one property such as those who have moved and been unwilling or unable to sell, those who have buy to let properties which have been their residence at anytime or those who might be transferring or selling their property on divorce at the end of a period of separation," explains Alex Henderson, tax partner at PricewaterhouseCoopers.


Henderson shows how the new CGT rules might work in practice. "Assume a person bought a house five years ago for £100,000. It is now worth £500,000. They lived in it for two years when they moved to another part of the country and let it out while they rented in their new location. They now sell their old home.

"Their gain is £400,000. Previously there would be an exemption for two years of real occupation and three years of deemed occupation so they would not be taxed. Now there is only an exemption for a total of three and a half years."

That means the remaining proportion of one and a half years is chargeable (1.5 years divided by five years – or 30%). "Depending on their other gains and income this could now amount to a tax liability of up to £33,600," calculates Henderson. That figure is arrived at by applying the higher rate of CGT (28%) to 30% of the £400,000 capital gain."

On the taxation of capital gains made by foreigners on residential property not used as a main residence, Lucian Cook, Savills head of UK residential research, says: "George Osborne announced that such a tax would apply on future gains, from April 2015. This is the least worst outcome for prime London and means that there will be no mass sell-off as foreigners crystallise past gains, and little incentive to exit or not buy into the London market going forward.

"We stand by our five-year forecast for prime central London, published in November, anticipating growth of 23.1%, assuming no further significant changes to taxation."

Rosalind Rowe, real estate tax partner at PwC, adds: "We are concerned about the government's intention to levy tax on future gains realised by non-UK resident individuals. The tax can be easily avoided - the owner just retains and never sells the property. It is unlikely to dampen the heat of the housing market and the costs of policing and collection will result in a potential net loss of revenue for the Exchequer. It also gives the wrong message - is Britain really open for business?"


• This article was taken from our sister website Money Observer.


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