Do you own property in the UK? If you do, and are not resident there, you need to be aware of changes to capital gains tax coming in next year. Whereas you may be able to avoid UK tax if you sell the property now, if you wait a year it will be a different story.
Current rules
UK residents pay capital gains tax at 18% or 28%, depending on how much income they earn that year, when they sell a property. There is an allowance of £10,900 per individual.
Principal Private Residence Relief is given to the main home. If you have occupied the property as your main home for the full period of ownership, the full gain is exempt from tax. There is a ‘grace period’ of 36 months, which are considered deemed occupation if the property had previously been your main home. In other words, you can take up to 36 months to sell the property after moving out of it, and you still receive the Principal Private Residence Relief.
If you are non-UK resident (and you need to be very sure about this, the rules are complex and catch many people out), then any assets you sell in the UK are free from capital gains tax – provided you remain non-UK resident for five complete and consecutive UK tax years.
The sale can be made at any time during the period after leaving the UK (although sales made in the UK tax year of departure or arrival usually remain taxable in the UK, so you need to time the sale and your move carefully). If however you then return to the UK before the end of the five year period, you will have to pay UK tax on the gain. This is not proportionate to the time spent outside the UK; you will pay the full amount of tax even if you return after four and a half years.
The gains are also taxable in Portugal, so you need to understand how the double tax treaty works.
Changes to the rules
As announced in the UK Autumn Statement, non-residents selling UK property will start to be taxed on the gains from April 2015. This is regardless of how long you have lived outside the UK, and will apply even if you never return.
The new tax will only apply to property; gains arising on other UK assets will not (so far anyway) be caught by the provision.
The Chancellor did not release information on how the tax will work, so we do not yet know if the same tax rates will apply as for UK residents, or if there will be any allowance. The government also needs to confirm if the tax will apply to gains since acquisition or only to those arising from April 2015 – the December documentation referred to “future gains”.
The fact that the new tax does not start until April 2015 provides a window of opportunity for those non-UK residents who were thinking of selling a UK property. This is a good time to review your assets, consider their tax efficiency, and take steps to avoid tax where possible.
There is a second change to the UK taxation of property gains, in this case to the Principal Private Residence Relief, and it applies from April 2014.
The 36 month grace period to sell your property tax free after moving out has been cut in half to 18 months.
Some people prefer to retain their UK property when they first move abroad, wanting to be sure they are happy and settled in Portugal before they sell up completely in the UK. They could be stung by this shorter relief period. You may of course have other reasons for delaying selling your UK property, but you now need to be mindful of this shorter 18 month tax-free window.
As always you cannot look at the UK rules in isolation; you also need to consider the local Portuguese rules and how they interact with the UK taxation. As a resident of Portugal, you are liable for capital gains tax on worldwide real estate gains, with the same tax treatment applying as to local property. When moving from one country to another, the timing of the move and of the sale of assets can make a significant difference tax wise, so take professional advice. You also need to be sure you fully understand the tax residence rules in the UK and Portugal, and this can be more complex than you realise. Getting this right can save you tax, getting it wrong can land you with an unexpected tax bill.
Tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; an individual is advised to seek personalised advice.
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Written by Gavin Scott, Senior Partner, Blevins Franks
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E: algarve@blevinsfranks.com
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