How UK Capital Gains Tax is applied to UK property when non-UK resident spouses divorce

3 November 2021

As non-UK tax residents, the couple will be subject to special rules for calculating the capital gains tax (“CGT”) due in relation to either the sale or transfer of their UK property.

CGT is self-assessed on an annual basis in line with the UK tax year. The rate of CGT in relation to gains realised on the disposal of UK situate residential property is 28%. 

Since 6 April 2019, chargeable gains realised on all forms of UK real estate held by all kinds of non-resident, both individuals and companies, have been within the scope of CGT (in the form of corporation tax if held within certain company structures).

The tax would ordinarily be charged on the difference between the sale proceeds and acquisition and enhancement costs, with no allowance for inflation if the couple were UK resident. However, as non- UK residents, the spouses will be subject only to Non Resident CGT which applies to disposals made on or after 6 April 2015.  Under the Non Resident CGT regime, the default position is to rebase property to its 5 April 2015 market value so that only a gain realised in excess of that value is subject to CGT.

In addition, in tax year 2021/22, individuals, including non-UK residents, can realise gains of £12,300 before CGT becomes payable under their annual capital gains tax allowance.

It is also possible for the taxpayer to elect  to straight-line time apportion the whole gain over their period of ownership (with only that part of the gain apportioned to their post-5 April 2015 period of ownership being subject to Non Resident CGT). Alternatively, the taxpayer may elect to subject the whole gain or loss over their entire period of ownership (both pre- and post- 5 April 2015).

If this is an issue faced by non-UK residents, we would advise that a market valuation of the property as at 5 April 2015 is requested from an estate agent or surveyor so that the taxable gain can be calculated.

The CGT implications if the property is sold and the proceeds are split

If the couple were to sell the property, the taxable gain would be calculated as the price for which the property was sold (provided that is the full market value), less the rebased market value as at 5 April 2015.

Allowable deductions can also be made from the disposal cost to include:

  • estate agents’ and solicitors’ fees;
  • the cost of the valuation obtained for the market value as at 5 April 2021; and
  • any expenditure incurred by the seller wholly and exclusively for the purpose of enhancing the value of the asset (if the expenditure is reflected in the state or nature of the asset when the seller disposes of it).

For Non-resident Capital Gains Tax purposes all disposals by non-UK residents of UK residential property must be reported using HMRC’s online return form within 30 days of conveyance of the property, irrespective of whether there has been a chargeable gain or tax to pay. This includes assets transferred to a spouse or civil partner. 

Where a property was jointly owned, each owner must tell HMRC about their own gain or loss. 

The deadline for paying any CGT due is the next 31 January after the end of the tax in which the gain was made. For example, if the property was sold between 6 April 2021 and 5 April 2022 the deadline to pay the tax due will be 31 January 2023. You can be charged interest and have to pay a penalty if your payment is late.

 

The CGT implications of the transfer of an interest in the property

Any transfer of an asset between spouses whilst they remain married is treated as giving rise to neither a gain nor a loss to the person transferring it and any amount actually paid is ignored. This is true for both UK resident and non-UK resident couples.

As non-UK residents, if the transfer occurs on or after 6 April 2015, the transferee (the person receiving an interest in the property) is treated as acquiring the asset at neither the gain/ loss amount. This treatment is available provided that the couple are treated as living together, which they will be unless separated:

  • under a court order;
  • by a formal Deed of Separation executed under seal; or
  • in such circumstances that the separation is likely to be permanent. 

Provided that the spouses were living together at some time in a tax year, they can transfer assets at any time in that tax year at no gain/no loss. There’s no requirement that they should be living together at the time of transfer.

However, it should be noted that on a subsequent disposal, the non-UK resident spouse to whom the property is transferred will be treated as having owned the asset from the date of transfer so will not be able to rebase the cost to April 2015, even though they may have acquired the asset before then.

Stamp Duty Land Tax (“SDLT”) may also need to be considered if consideration for the transfer of the property is being paid but it should be noted that a transaction is exempt from SDLT when a couple divorce, separate or end their civil partnership, and they either:

  • agree to split their property and land between them; or
  • split the property under the terms of a court order. 

It is, therefore, advisable to deal with the division of interests in the matrimonial home or any other shared property as part of the separation or divorce proceedings instead of putting this off until a later date.

 

Formalising an interest retained in a property owned with a former spouse through a court order is also advisable if that spouse intends to buy a replacement property. Ordinarily, anyone who has a “major interest” in a property would be subject to the higher rate of SDLT where an additional 3% is charged on purchasing a further property.  However, a special exemption is made for separated or divorced parties who have retained an interest in a property subject to a property adjustment order issued by the court. They will not be subject to the higher rate of SDLT if they can provide evidence of the property adjustment order provided certain conditions can be met by both parties at the time of purchase of the additional property. Advice should be sought if this is likely to be an issue.

This article was originally published by ThoughtLeaders4 HNW Divorce Magazine in their October 2021 issue.

FURTHER INFORMATION

If you would like any further information or advice about the topic discussed in this blog, please contact Laura Harper or our Private Client team.

 

ABOUT THE AUTHOR

Laura Harper is a partner in the Private Client team. She advises both UK resident and non-UK resident/domiciled individuals, families and trustees on a wide variety of UK tax, trust law and international estate planning issues, including the planning to be undertaken when moving to or from the UK. She also has extensive experience working on cross-border matters and structuring involving family-owned businesses.

 

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