In this summer edition of the Frontier Newsletter our focus is on UK property tax changes which have either happened or are in the process of coming into action in the foreseeable future. If you are intending on disposing property assets whether you are UK Resident or Non-UK Resident, the below articles are worth a read before contacting us to ensure they are planned out in the most tax efficient manner.
CGT: Changes proposed for PRR
HMRC want to better focus the Private Residence Relief (PRR) by ensuring that those gains or losses that arise when a person sells or otherwise disposes of a dwelling that has been used as that person’s only or main residence is kept outside of the realm of Capital Gains Tax. Since its
inception in 1965 it provided a protection that homeowners who legitimately occupied their properties will not be hit with a tax bill in the event they sell and move on to another property for whatever reason.
The proposed changes are as follows:
- Reducing the final period exemption from 18 months to 9 months;
- Restricting lettings relief to periods where the property owner is also in occupation;
- Adjusting the rules for giving PPR where the property has been transferred between spouses;
- Legislating for extra statutory concessions: D 21 (late claim for main residence) and D49 (delay in moving into a property); and
- Extending the PPR relief for job-related accommodation to military service personnel, where the accommodation is not owned by the MOD.
Lettings relief will no longer apply for periods where the whole house is let, which will hit “move and let” landlords.
These changes are all expected to come into effect for disposals made on and after 6 April 2020.
Non-residents and UK real estate: the April 2019 changes
The Finance Act 2019 has greatly extended the territorial limits of UK tax where capital gains are concerned. Non-resident persons are now taxable not only on UK residential property gains, but also on UK commercial property gains. However, the most radical aspect of the FA 2019 is the introduction of new rules allowing non-resident persons to be taxed on gains realised on the disposal of assets that are not themselves UK land, but derive some or
all their value from UK land.
Non-residents have for some time had an advantage over UK residents when it comes to the taxation of UK commercial real estate, because unlike most other major jurisdictions the UK does not exercise its full taxing rights
as afforded by international tax rules.
The government now attempts to ‘level the playing field’.
From 6 April 2019, a single UK tax regime will apply to sales of both residential and commercial UK real estate by non-residents, comprising
- a new UK tax charge for gains on “direct” sales of UK real estate; and
- a new UK tax charge for gains on “indirect disposals” of UK “property rich” interests. This will bring within the scope of UK tax disposals by non-residents of certain companies, partnerships and unit trusts holding UK real estate.
The applicable rate of UK tax will be 19%
for non-resident companies caught by the new rules and, for non-resident individuals and others, up to 20% (in the case of commercial property) and up to 28% (in the case of residential property).
The new tax charge(s) will in each case only apply to gains arising since 6 April 2019 (i.e. property held at that date will be rebased to its current market value).
One aspect of the new regime that has been the subject of much debate is that, from 6 April, a tax charge will arise on gains on disposals by non-residents of interests in entities that themselves hold UK real estate. This so-called “indirect disposal” charge will only apply to disposals of interests in “property rich” entities. This will be the case if:
- at the time of disposal, at least 75% of the value of the interest (e.g. shares) sold is derived from UK land. This test is applied to the gross-asset value of the entity in question, using the market value of the assets at the time of disposal; and
- the non-resident making the disposal holds at least a 25% interest in the entity.
There will be a “trading” exemption so that (broadly) a disposal of an otherwise “property rich” entity by a non-resident will not be caught by the new tax charge if the UK land held by the entity is used in the course of a trade during the 12 months prior to the disposal, and immediately
after. This is likely to benefit hotels, care homes and retailers.
Falling to 17% from April 2020.
In this summer edition of the Frontier Newsletter our focus is on various US tax matters that you should take into consideration. Please read the articles below, these are a few topics that have been brought to light in the last few months.
Virtual currency not FBAR reportable
Tax practitioners and taxpayers alike have long struggled to determine whether virtual currency, aka cryptocurrency, is reportable for purposes of FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR).
Virtual currencies have several simultaneous properties that make them challenging for practitioners and regulatory bodies to classify.
The AICPA Virtual Currency Task Force reached out to Treasury’s Financial Crimes Enforcement Network (FinCEN) to help practitioners answer this question. FinCEN responded that regulations (31 C.F.R. §1010.350(c)) do not define virtual currency held in an offshore account as a type of reportable account. Therefore, virtual currency is not reportable on the FBAR, at least for now. This may change in the future, especially considering the influx of stable coins.
US/UK Charitable Donations
US & UK taxpayers must be careful when planning to make any charitable donations to ensure that it is tax efficient.
A UK resident taxpayer should typically donate to a UK charity instead of a US charity due to the higher tax relief which can be claimed on the donation. Taxpayers who have both a US and UK tax liability should consider donating to a dual qualified US/UK charity to obtain the maximum relief.
If the charity of your choice does not have a dual qualified entity, then you should consider donating to a dual qualified Donor-Advised Fund.
Donations to these entities are recognised for tax purposes in both jurisdictions.
Interest rates decrease for the third quarter of 2019
The Internal Revenue Service announced that interest rates will decrease for the calendar quarter beginning 1st July 2019. The rates will be:
- 5% percent for overpayments [4% percent in the case of a corporation];
- 5% percent for underpayments; and
Under the Internal Revenue Code, the rate of interest is determined on a quarterly basis. For taxpayers other than corporations, the overpayment and underpayment rate is the federal short-term rate plus 3 percentage points.