Focus on UK residential property ahead of the budget

Quick read

The first Autumn Budget of the new Labour government has been set for 30 October 2024 and there is a great deal of speculation that the government will introduce changes to the current rates of UK taxation. An increase in rates of capital gains tax is rumoured, in which case there might only be a short window between now and the Budget during which individuals could look to make disposals at the current rates, including those who own UK real estate.

Since April 2015, all non-UK residents holding UK residential property have been within the scope of UK capital gains tax (and since April 2019 for non-residential property). So, any changes introduced by the Budget will impact non-UK resident property owners at some point. In that context, this article highlights the possible steps that such individuals may consider taking between now and the Budget.

Capital Gains Tax

At present, the highest rate of tax applicable on the disposal of UK residential property is 24% and 20% for gains relating to non-residential property.

At this stage, there has been no confirmation that rates of capital gains tax will increase or, if so, to which rate(s). However, it has been rumoured that the government could bring the rates in line with income tax (with the highest rate of income tax being 45%).

There is also uncertainty as to when any such increase would be introduced. For example, the tax increase could have immediate effect and apply from the date of the Budget ie 30 October 2024 or it could be delayed until the beginning of the next tax year i.e. 6 April 2025. We await the announcements on 30 October 2024 in this regard also.

As a consequence of this uncertainty, individuals who currently own UK residential property, (particularly where such assets are standing at a large gain) might consider using the window of opportunity currently available to realise those gains and pay tax at the current rates, particularly if there is an intention to dispose of the asset in the near future in any case. It is possible that the opportunity to utilise the current rates may be lost after the Budget.

There are two ways (amongst others) in which this could be achieved in relation to UK property:

The first option is selling the property to a third party on the open market. However, there may not be sufficient time between now and the Budget to exchange contracts.
The second, and probably quicker option, is to transfer all or part of the property to family member(s), for example, children and/or grandchildren, eg by way of a gift. The recipient should then have an uplifted base cost going forwards for capital gains tax purposes, and this may also improve the inheritance tax position (see below).

If the property in question is standing at a gain (after taking into deductible expenses), then the transfer will cause the gain to be taxed (subject to any available relief). However, provided that the transfer takes place before 30 October 2024, the applicable rate of tax should be capped at 24% for residential property and 20% for non-residential property. As mentioned, if the transfer were to take place after 30 October 2024, the current rates may not apply.

Inheritance tax

UK residential property (however held) is within scope of UK inheritance tax on the passing of the owner. The current rate of inheritance tax is 40% over and above the nil-rate band (which is currently £325,000).

If an individual were to gift an interest in UK residential property to another individual then the gift is regarded as a potentially exempt transfer (PET) under existing inheritance tax rules and is not taxable if the donor survives seven years (provided that, in broad terms, the donor does not continue to enjoy the property gifted away).

After three years, the applicable rate of inheritance tax on the gift begins to taper down each year until it reaches 0% on the expiry of seven years.

There is currently no lifetime limit on gifts which can qualify as PETs (such that they suffer no inheritance tax if the donor survives the gift by seven years) under the UK inheritance tax rules. However, there has also been some speculation as to whether changes to the inheritance tax rules relating to gifts will be announced in the Budget This has included speculation that the government could introduce a limit on the amount an individual could give away during their lifetime without incurring a lifetime inheritance tax charge. In that regard, there may be merit in accelerating gifts so that they fall under existing rules and, in any event, gifts made now will start the seven year "clock" sooner.