x Abu Dhabi, UAESaturday 20 January 2018

Ins and outs of Britain’s capital gains tax

The nitty-gritty of how it applies to property.

One surprise change to Britain’s capital gains tax (CGT) rules could have consequences for less affluent expatriate workers, who have been renting out their main home in the United Kingdom.

Previously, if you had become a landlord because you could not sell your home, were splitting up or were going to work overseas, you did not have to pay CGT on its sale for three years after the period in which you lived in it.

This gave expat workers who have moved to the Arabian Gulf valuable flexibility. From April, however, that period will be halved, prompting fears that many homeowners who have become “accidental landlords” will be caught out.

The chancellor of the exchequer, or finance minister, George Osborne, said the decrease was designed to “reduce the incentive for those with multiple homes to exploit the rules”.

The government expects it to raise £360 million (Dh2.16 billion) over the next five years, more than double the tax on foreign property owners.

CGT, which is 28 per cent for higher tax rate payers, kicks in only on profits made after the exemption period ends and excludes any time period when the seller lived in the property.

So how does it work? Knight Frank offers an example of a buyer who bought a prime central London property in 2006 for £1m. After living there for three years, he decided to move to Abu Dhabi and let the property out in November 2009.

He sold in November this year and, according to the Knight Frank prime central London index, the property would have fetched £1.67m, representing a gain of £670,000.

Under the current law, capital gains tax would be applied only for one of the seven years the buyer owned the home, as there is relief for the three years he lived there plus the three-year exemption he gets under the current law.

Ignoring transaction fees, lettings relief or annual capital gains tax exemptions, the buyer’s capital gains tax bill would have been about £27,000.

Under the new rules, the exemption period will be four-and-a-half years, which is the three years he lived in the house plus the new shorter 18-month exemption period. That will produce a £67,000 CGT bill – meaning he will be £40,000 worse off.

Landlords will have to factor these extra costs into their calculations, but the appeal of buy-to-let properties in the UK for Abu Dhabi workers remains strong.

And outside London, many are much more interested in buying for the income they receive from a property, rather than for capital appreciation.

Paul Bell is one such investor. An oil and gas engineer originally from the UK, he lived in different countries for many years but has been settled with his wife in Abu Dhabi for 13 years.

Mr Bell is planning to return to the UK on his retirement but because he has been living outside of the country for so long he doesn’t qualify for a state pension, so he needed to come up with an alternative way of saving for his pension.

Property seemed to be the most profitable way to protect his future and over the years he built up a portfolio of six buy-to-let properties in the UK and UAE.

His most recent buy-to-let purchase is in Liverpool city centre and it is in a bespoke student development in a fully managed project called The Chapel.

Vita Student, the company behind the scheme, is a luxury student accommodation provider that has six developments across the UK: in Liverpool, Manchester, Bristol and Exeter.

Mr Bell was looking for a good investment but it was the distinctiveness of the building that first caught his attention. “Big developments are usually quite conventional builds but the beautiful exterior of The Chapel made it stand out when we were looking for a new property investment,” he says.

“We hadn’t considered buying student property before, but after researching it we found that the returns were stronger than any other property group.”

He has even managed to find a UK scheme that is similar to the guaranteed rental returns that are found in the UAE.

“Guaranteed yields are commonplace in the UAE but are more unusual in the UK, so we jumped at the chance to benefit from a guaranteed 9 per cent return for two years.”

Even the sales process was easy, as it was handled by an adviser in Dubai.