Former UK Resident selling a UK property

[Laura]

I have been living in New York for the past 2 years. I own a flat in London. I lived in it for 3 years when I purchased it and I have friends living there now. I am considering selling and am confused as to the Capital Gains Tax laws. One person told me I have to be absent (i.e. non resident for tax purposes) for a further 3 years (so, a total of 5) before I can consider selling the property and avoiding CGT. Another person recently told me that I am allowed to rent the property out for 36 months and, provided I sell it during this time, I am still exempt from Capital Gains Tax.

I am aware that I also must pay CGT in the US if I sell after 36 months (need to live in property for 2 out of the last 5 years), so I need to know what the UK tax laws are as well.

Can anyone help?

Thanks

[taxman]

Hello Laura

The basic position for CGT is that to a certain extent both pieces of advice are correct.

1) In order for the gain to be exempt on the basis of you being a non resident, then you would usually need to be non-resident & ordinarily resident for 5 tax years (ie outside the UK for 5 tax years) subject to certain temporary periods that you are allowed to return.

2) The other advice related to the use of the main residence exemption. As you occupied the residence as your main residence at some point, then the last 36 months of ownership will be deemed occupation.However, there is then also the issue of your time spent abroad. If this is not exempted as the last 36 months, then this will only be exempted under seperate deemed occupation rules if you were to reoccupy the property as your main residence after your return from the UK. If you are not intending to reoccupy the property, then could potentially use the lettings exemption depending on whther friends are renting the property etc.

The abovce advice is quite general & brief I'm afraid, however if you would require more specific advice then I would require further details such as whether you were UK resident before the US residence, how long you were uk resident, whether a lease agreement to friends, whether you intend to return to the US etc
Regards

[steve@nunn-hayward.c]

Hello Laura,
The points your friends are making are looking at the issue from two entirely different sets of rules and hence your confusion.
A person who is Not Resident and Not Ordinarily Resident (NR/NOR) is not normally chargeable to UK CGT at all. Where however, you are a previously UK Resident person an do not become NR/NOR for 5 complete UK tax years then any gains made whilst overseas will become taxable on the date of your return. So, you can sell the property now, but if you become UK reident etc prior to 6th april 2006, you would be relying on normal UK tax rules to calculate any gain on your return.i.e. if you are NR/NOR and are certian not to return here, UK CGT should not be an issue.

This then leads onto the comments of your other friend. If we assume you will or may be liable to UK CGT at some stage, there are a number of valuable reliefs for a Main Residence. The actual priods of occupation should be exempt. There is also a valuable "deemed" period of occupation, the last 3 years of ownership, which is due almost regardless of use made of the property. However, there are other relief's due which depend on whether you return and occupy the property for even a short period, or are working overseas. You should also not forget that you will be due an annual "Exemption "(currently £7500), a small amount of "Indexation relief" as well as some "Taper Relief" at the non- business rate.

The interaction with your US position is important as potentialy total taxes there may exceed your exposure here. Please remember however if your circumstances lead to CGT in both countries a "credit" for one can normally be obtain against those in the country in which you are mainly resident.

There are a number of points to consider about the lenght of your stay, it's purpose and your intentions that will effect the end result.

I would be pleased to assess the UK issues and liase with your US advisor to mitigate your exposure to Tax on a worldwide basis. Please call/ e mail if you wish to take things further.

Regards

Steve Cook, ATII
Tax Partner,
Nunn Hayward, Chartered Accountants
01753 888211

[Laura]

Thank you both for your comments. Of course I'm still slightly confused. Let me see if I can a/ give you more information and b/clarify some of your comments.

Firstly, the facts, I was a UK resident before moving to the US on June 1st, 2000. I had been a UK resident all my life. I purchased my flat in September, 1997 and lived in it for just under three years (I rented it from July 1st, 2000 and and purchased it on September 5th, so it's just 2 months short of 3 years), before renting it to friends. Yes, they signed an assured short-hold tenancy agreement and yes we informed the Inland Revenue that the flat was being rented out. Every year when I fill out my tax return I declare the rental income and pay tax on it.

Now to my questions:
1/ I'm confused as to the "Main residence exemption". Are you saying that I can only claim this if I do NOT sell the property whilst I am in the US and then return to live in it before selling it? In this case, I won't be taxed on the CGT whilst I was away?

2/ You mention "Lettings exemption". Am I eligible for this? How would this work?

3/ Steve, am I right in understanding that you are saying that, if I sell the flat now, I might be exempt from CGT but if I then choose to go back (even though the flat is already sold) I would then be eligible to pay the CGT?

4/ Could you explain a little more about the "deemed" period of occupation. You are saying, I think that, even if I am liable for CGT, the gain between 1997 and 2000 will be exempt (how do we work out what the property was worth then compared to when I sold it?). Then are you also saying that the last 3 years are exempt too (so, I don't pay for the 3 years I lived there and I don't pay for the last 3 years so, given that I have been away 2 years, I could still wait a further year before selling and be totally exempt???) Is this correct?

5/ At this stage, I am unsure about the length of my stay. I am trying to ascertain whether I have to retain my property for a further 3 years in order to avoid CGT (but then I have to pay it here at 20%) or whether I can sell before next June to avoid paying in either jurisdiction.

6/ Last question: I know CGT in the UK is 40%...is it the same for non-resident?

Thanks so much for your help

Regards

Laura

[Anthony Nixon]

My advice is not to worry about the points raised in your paragraphs 1 to 3, 5 and 6. In particular any answer to your question about rates of CGT would have to be incredibly complex.

The good news is that your point 4 is absolutely right. You have a further year in which to sell the flat free of UK capital gains tax.

There are quite generous extensions to the main residence relief where you move out of your residence because you are working abroad so you may even be able to sell free of tax, or at little cost in tax, after that year. Depends whether you want to sell anyway.

Under the rules which applied until a few years ago you would have been exempt from tax anyway if you sold while you were resident outside the UK. It is this exemption which no longer applies unless you remain non-UK resident for a full 5 tax years, but you do not need to worry about this if you sell the flat within the next year.

Anthony Nixon ATII
Associate Solicitor
Lester Aldridge Solicitors
Russell House
Oxford Road
Bournemouth BH8 8EX

Telephone: + 44 (0)1202 786161
Direct Line: + 44 (0)1202 786155
Fax: + 44 (0)1202 786170
E-mail: Anthony.Nixon@Lester-Aldridge.co.uk
Website: http://www.lester-aldridge.co.uk