UK capital gains tax on furnished holiday lets sold by non-residents

The charge to UK capital gains tax for non-residents

Individuals who are not resident in the UK may be chargeable to UK capital gains tax on two bases:

• They operate a business in the UK through a branch or agency, in which case all assets used in that business are chargeable to tax; or
• They dispose of an asset that is land situated in the UK.

A gain under the first category may be calculated as the disposal proceeds minus the allowable costs regardless of the original date of acquisition (although there are slightly different rules for property purchased before 31 March 1982 or before 6 April 1965).

Disposals of residential property by non-residents have only become chargeable to UK capital gains tax from 6 April 2015 (6 April 2019 for commercial property). There are different methods for working out the gain that seek to charge to tax only the gain since 6 April 2015, called rebasing or time apportionment.

Branch or agency

A branch or agency is not clearly defined in UK legislation, but it will generally be self-evident. A foreign bank, for instance, will have a foreign branch when it sets up business and has physical branches. It will be recognised by the public as being in business in the UK without it formally having set up a subsidiary company.

It would be highly unusual for a single furnished holiday let property to be considered a branch or agency for the purpose of capital gains tax as there is no outward sign that there is a base of administration or management, and no-one 'on the ground' in the UK able to make commercial decisions for the business. An individual with a single furnished holiday let should therefore not be considered to be operating through a branch or agency.

Furnished holiday letting

A furnished holiday let is treated differently to the ordinary letting of a residential property. There are certain qualifying rules involving the number of days that a property is let each year and how long each individual let lasts. Qualifying as a furnished holiday let can have advantages, however, as the profit is treated as trading income allowing certain reliefs to apply such as pension relief and interest deductibility. For UK capital gains tax purposes, it may result in Business Asset Disposal Relief (formerly known as Entrepreneur's Relief), reducing any capital gains tax rate down to a 10% tax rate.

Non-resident capital gains tax

In all other respects, the disposal of a furnished holiday let property will be treated as the disposal of a residential property for non-resident capital gains tax purposes. This means that, when the property was first acquired before 6 April 2015, the gain will be calculated by way of three methods: full, rebased or time apportioned. The net gain may then qualify for Business Asset Disposal Relief to reduce the tax charge from 18% or 28% down to 10%.

Disposals of UK residential property must be reported to HMRC within 60 days of settlement/completion, and any tax due must be settled by that time also. It is likely that the gain will also need to be returned on a Self Assessment tax return alongside the rental profits earned in the period up to the date of sale.