This year’s Budget introduced considerable changes to the taxation of high value residential property in the UK. The two most significant changes announced were a proposed annual charge and, for the first time in the history of UK Capital Gains Tax (CGT), the extension of the current regime to include certain non-UK residents. These proposals were dis-cussed more fully in a consultation document issued by the Treasury on 31 May.
The Government policy driving these proposals is not clear, although it appears to be determined to dis-courage the practice of holding high value UK resi-dential properties through companies, and possibly other entities such as trusts, by seeking to make it une-conomic for anyone other than an individual to hold such properties. The target seems to be the possibility of Stamp Duty Land Tax (SDLT) avoidance (because if it is possible to sell what is referred to as the corporate “envelope,” rather than the property itself, then SDLT will not be payable). If this really is the policy driver, then it is misguided. Experience shows that so-called corporate “envelopes” are not used to avoid SDLT, but to maintain anonymity of ownership and mitigate the exposure to UK Inheritance Tax.
SDLT: the current rates
With effect from 21 March SDLT rates for residential purchases are:
\- 7% on properties worth more than £2 million.
This rate can still be reduced to a maximum of 4% for “mixed use” properties (i.e. where both residential and non-residential properties are acquired in the same transaction).
\- 15% on properties worth more than £2 million where the acquiring party is a “non-natural person”.
For mixed use property transactions the SDLT rate for the non-residential property component will still be a maximum of 4%.
These rates give rise to some strange results. If the buyer is only rich enough to be able to afford a town house in Notting Hill for over £2m then he or she will now be paying SDTL at 7%. If, however, the buyer is (as an individual, not through a company) investing in a palatial house, parkland and farm for (say) £80m then the SDLT rate is 4%, because it is a “mixed” purchase.
Annual Charge
The consultation document proposes that the new 15% SDLT rate and the Annual Charge will apply to the same categories of “non-natural person”, that is:
• Companies;
• Collective investment schemes; and
• Partnerships that include a body corporate.
However, there is a proposed exclusion for bona fide property development businesses, to which the annual charge will not apply.
The first annual charge will be payable on 1 April 2013. If the property was owned on 1 April 2012 the value of the property on that date will be used to cal-culate the charge. For properties acquired after 1 April 2012 the acquisition value will be used. The charge is to be calculated on the market value of the property and will be self-assessed, so those liable to pay it will be responsible for the valuation used. The safest way to go about this will be to commission a professional valu-ation report, although the consultation document sug-gests HM Revenue and Customs may offer a valuation checking service.
Properties will have to be re-valued every five years, so in the case of properties owned on 1 April 2012 the next valuation will need to be carried out as at 1 April 2017 for the purposes of the April 2018 annual charge.
As announced in March, the rates of annual charge range between 0.35% and 0.75% and these will be increased each year in line with inflation.
CGT
Under existing rules UK CGT is generally only payable by persons (individuals or companies) who are resident in the UK. This does put the UK out of step with most of the rest of the world (as the consultation document acknowledges) which tends to charge real estate gains by reference to where the real estate is located, not by reference to where the owner is resident.
The new regime will ensure that, where non-resident, non-natural persons dispose of UK residential property for more than £2 million, CGT will be chargeable on any gain. The stated policy aim is that this CGT change is intended to act as a further discouragement for resi-dential property to be held through “envelope” (i.e. cor-porate) arrangements.
The expression “non-natural person” may be given a broader definition for CGT purposes than the one used for the 15% SDLT rate and the annual charge. It will include companies but, subject to the outcome of the consultation exercise, may also include trusts, personal representatives, clubs and associations (though not charities) and entities that exist in other jurisdictions that enable property to be held indirectly – for example, foundations.
This new measure will apply to historic gains, so that on disposal CGT will be payable in respect of the total gain accrued during the period of ownership of the property - not just on the gain accrued after imple-mentation of the new charge in April 2013. Moreover, it will also apply to any gains that arise on the disposal of assets that represent UK residential property: such as shares in a company where more than 50% of their value derives from UK residential property.
If trusts are made subject to this new CGT regime and the property held by the trust is occupied by a benefi-ciary throughout as his or her sole or main residence, it is likely that 100% relief from CGT should continue to apply to any gain realised on a disposal. However, if the disposal is by a company, the main residence exemption will not be available.
Action points
Those considering buying now may be best advised to keep things simple and acquire the property personally, while looking at other means of limiting their exposure to IHT. This would avoid payment of the annual charge and, where the individual is not a UK resident, any lia-bility to CGT on a sale. Possible solutions to mitigate the IHT exposure might include life assurance, using debt to reduce the property’s value or splitting the own-ership between several family members.
So far as UK resident property owners are concerned, decisions to revisit any property holding structure should generally be delayed until publication of draft legislation this Autumn. Any decision needs to be taken with care because of the risk of triggering tax liabilities under current rules – for example on the winding up of a company that holds the property.
Non-UK resident property owners might consider winding up companies owning high value residential assets and holding the property personally instead or, depending on the outcome of the consultation, through a trust. Again, those who are non-UK resident and who hold UK residential property through an offshore struc-ture might consider selling the property before 6 April next year without any charge to CGT.
There are many other considerations – such as whether paying the annual charge might be preferable to an IHT charge on death. This will depend on a number of factors including the age and marital status of the owner. Thought will have to be given to whether the extended CGT regime will in practice be relevant to an individual’s circumstances.
Finally, confidentiality is a key concern for many prop-erty owners so it is common for properties to be held via nominee companies. As long as a company is holding a property for an individual or a trust, then the 15% rate of SDLT will not be payable on purchase and the Annual Charge will not become due. The questions that remain are how to deal with the IHT exposure and whether trusts may be affected by the new CGT regime.
