In the past, people who have lived outside of the UK for five years have been exempt from capital gains tax when selling UK properties. From April 6, 2015, these rules changed so non-residents owning UK residential property are now subject to UK capital gains tax.

Only the proportion of the overall gain that relates to the period after April 5, 2015 is chargeable, and this can be calculated in one of two ways, at the choice of the taxpayer.

Option one – rebasing – requires the sale value to be reduced by the open market value on April 5, 2015. Option two – apportionment – allows the full gain from purchase to sale to be reduced by the period of ownership until the rule change as a proportion of the full time of ownership.

As it is the taxpayer’s responsibility to accurately value the property, you must request one or more professional valuations as soon as possible. This will mean that when you come to sell these properties and calculate your tax liability you will have a formal valuation that took place close to the date of the rule change.

As only gains after April 5 this year are taxable, if you do wish to sell, you are best doing it quickly to avoid or at least minimise any tax liability.

There are more taxes to consider. Inheritance tax should not be forgotten. There is a common misconception that only the estates of UK domiciles are subject to UK inheritance tax. This is not the case: all property will be taxable if it is in the UK, and the liability upon death is 40 per cent above a nil rate band of £325,000.

In addition, owning a UK property in itself would count heavily in favour of you being deemed to be UK domicile. If this is the case, it would mean that all of your worldwide assets would be considered for UK inheritance tax.

Also, rental income is subject to income tax in the UK. While the £10,600 personal allowance might partly offset it, consultation initiated in 2014 concluded that it would be desirable for this allowance to be removed for non-UK residents from 2017. Further consultation in this area is expected.

Investing directly in residential property may feel like a low-risk option, especially as you get a physical asset to show for your money. But if property prices decline, and you don’t hold other investments to offset the losses, you could potentially lose a considerable amount of money.

Property is generally illiquid, so selling quickly normally means accepting a lower price. It should be remembered that although the UK has seen good property growth since 2009, between 2008 and 2009 the average UK property price dropped by close to 25 per cent.

Mark Carney, the governor of the Bank of England, reflected upon a housing ‘bubble’ in London and the southeast. With interest rates also being at a historical low, any increase may substantially weaken demand, with distressed sales having the ability to negatively disturb the market. Finally, given the political climate, the threat of a ‘mansion tax’ might not be good for property prospects.

Nobody knows what the prospects are for UK residential property in 2015 and beyond, but as the graph above shows, prices have been subject to considerable fluctuations in the last 10 years.

If the property is rented, tenants can cause another form of headache on top of all the taxes you have to work your way through. While there will always be an appeal to owning ‘bricks and mortar’, owning a UK property while living in Malta has become far too complex and highly taxed for many.

www.michaellavin.com

Michael Lavin is an independent financial adviser for expatriates.

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