Sale of UK buy-to-let by an overseas resident

Sale of buy-to-let by an overseas person

This note explains the UK capital gains tax (CGT) on the sale of a UK buy-to-let, holiday or second home, by a non UK resident. For example, it applies to an Italian who lives in Italy and wants to sell a UK rental property. It’s a surprisingly confusing area, which we have found many people often get wrong.

Timing of reporting a sale

Non-residents, like residents, must report disposals of UK property to HMRC within 60 days of sale, even if there’ i’s no tax liability or a loss was realised. Any tax must also be paid within 60 days.

Capital gains tax rates on residential property sales

In the UK, CGT is charged at 18% and 24% for individuals for residential property gains.

Properties purchased after 5/4/15

For properties purchased after 5/4/15 the rules are simple. The gain is calculated by subtracting the purchase cost from the sales price. Enhancement expenditure and any indirect costs, such as stamp duty and legal fees on both the purchase and sale can be deducted from the gain. Once the gain is calculated it can be reduced by the capital gains annual exemption (currently £3k, but £6k in recent proceeding years) and any non resident capital losses carried forward from previous years. HMRC provide the following example of this calculation in Help sheet HS307 We have adapted this example slightly below.

Example 1: Disposal of UK residential property acquired after 5/4/15

You dispose of a UK residential property for £1,250,000 in 2023. The incidental costs of the disposal are £10,000, making the net disposal proceeds £1,240,000. You acquired the property in 2017 for £750,000 plus stamp duty and other costs of £40,000. You then spent £20,000 enhancing it. This gives a gain of £430,000 as calculated in the table below.

Disposal proceeds	£1,250,000
Incidental disposal costs	£10,000
Net disposal proceeds	£1,240,000
Acquisition cost	£750,000
Incidental acquisition costs	£40,000
Enhancement costs	£20,000
Total cost	£810,000
Gain	£430,000

Properties purchased before 6/4/15

If you purchased the property before 6/4/15 the situation is more complicated. – Prior to 6 April 2015 non-UK residents did not need to pay CGT on the sale of UK residential property. This changed from 6/4/15, and from this date forward CGT became payable, even by non-UK residents. This tax is referred to as Non Resident Capital Gains Tax or NRCGT. Because the rules changed from 6/4/15 NRCGT is only payable on the gain accruing from this date – if the property was acquired before this date the gain needs to be apportioned.

There are three ways of apportioning the gain:

• Market Value at 5/4/15 – The default way of apportioning the gain is to assume that the property was sold and immediately repurchased at its market value at 6/4/15. Obviously, to do this you need to know the market value at 5/4/15, which most of our clients don’t. To get round this, you could appoint a surveyor to calculate the market value for you. If you use this method the only costs that you can deduct are the acquisition cost of the property, costs of enhancing the property after 6/4/15 and the incidental costs of selling the property. You can’t deduct the incidental costs of making the acquisition or costs of enhancing the property made before 5/4/15. This makes sense, because both should be reflected in the market value of the property at 6/4/15.
• Time apportioning the gain– An alternative to the default method is to elect for the gain to be on a time apportionment basis. In this method. If you use this method you can deduct the acquisition cost of the property, costs of enhancing the property and the incidental costs of buying and selling the property. This makes sense, because all these costs need to be considered when time apportioning.
• No rebasing – as a final method, you can elect to ignore the rebasing entirely and to calculate the gain as shown in example 1. This method can be useful if a property has steadily deteriorated in value as it can result in a higher capital loss.

HMRC provide various examples of the methods in in Help sheet HS307 and in Guidance here.

Example 2: Disposal of UK residential property owned before 5 April 2015 (Default Rebasing Method)

You dispose of a UK residential property for £1,250,000 in 2023. The incidental costs of the disposal are £10,000, making the net disposal proceeds £1,240,000. You acquired the property in 2011 for £750,000 plus stamp duty and other costs of £40,000. You then spent £20,000 enhancing it in 2016. However, the market value at 5/4/15 was £1,000,000, so you decide to check the gain that the default method gives. The default method gives a gain of £220,000 as calculated in the table below.

Disposal proceeds	£1,250,000
Incidental disposal costs	£10,000
Net disposal proceeds	£1,240,000
Market Value 5/4/15	£1,000,000
Incidental acquisition costs (not allowable because market value at 5/4/15 is used)	Nil
Enhancement costs (allowable because incurred after 5/4/15)	£20,000
Total cost	£1,020,000
Gain	£220,000

HMRC provide an example of the time apportionment method here We have adapted this slightly in the table below.

Example 3: Disposal of UK residential property owned before 5 April 2015 (Time Apportionment Method)

You dispose of a UK residential property for £1,250,000 on 30/06/23. The incidental costs of the disposal are £10,000, making the net disposal proceeds £1,240,000. You acquired the property on 05/01/11 for £750,000 plus stamp duty and other costs of £40,000. You then spent £20,000 enhancing it in 2016. However, the market value at 5/4/15 was £1,000,000, you decide that you will check what the gain is using the time apportioning method. The time apportioning method gives a gain of £283,711 as calculated in the table below.

Disposal proceeds	£1,250,000
Incidental disposal costs	£10,000
Net disposal proceeds	£1,240,000
Acquisition cost	£750,000
Incidental acquisition costs	£40,000
Enhancement costs	£20,000
Total cost	£810,000
Gain over ownership period	£430,000
Days between 05/4/15 and sale date 30/06/23	3,008
Days between purchase date 05/01/11 and sale date 30/06/23	4,559
Time apportioned gain post 05/04/15 (£430,000 x 3,008/4,559)	£283,711

Note that the calculation calculates the time apportioning as if the enhancement costs were made on the acquisition date. This seems illogical, but it appears to us to reflect how the legislation is written. If a reader feels differently, please let me know.

Losses and Annual Allowance

Where the disposal by a non-resident results in a loss, the loss may be set off against any gains arising on the disposal of UK land in the same year or carried forward to be set against such gains accruing in future years. Also, the Annual Allowance (currently £3k but in recent years £6k) can also be used to reduce the gain.

Procedure

The procedure that needs to be followed can be found in HMRC Help sheet HS307. Basically, you can use an online form, which is available in your Government Gateway Account. Alternatively, if you can’t use the online form you can send a paper return to HMRC. You can find the paper return here. Once you’ve done this, HMRC will send you a 14-digit payment reference number that you need to quote when you are paying the capital gains tax. Finally, at the end of the year, when you fill in your tax return you need to fill in the capital gains summary pages on Form SA108.

Sale of buy-to-let by an overseas person This note explains the UK capital gains tax (CGT) on the sale of a UK buy-to-let, holiday or second home, by a non UK resident. For example, it applies to an Italian who lives in Italy and wants to sell a UK rental property. It’s a surprisingly confusing […]