Extension of the tax rules applicable to “High Value” UK residential Property
In the Budget today the Chancellor announced extensions of the tax rules that presently apply the acquisition and ownership of UK residential properties worth more than £2m by various “non-natural persons” but which principally consist of companies and, in particular non-UK resident companies.
The particular taxes are:-
- stamp duty land tax (‘SDLT’) at 15% on the acquisition of a residential property;
- the annual tax on enveloped dwellings (‘ATED’); and
- capital gains tax (‘CGT’), presently at the rate of 28%, on a capital gain on the disposal of the property. (The gain is calculated by reference to the acquisition cost of the property or, if it was held on 5 April 2013, its market value on that date if that is higher).
The 15% penal rate of SDLT will be extended to transfers of UK residential property worth more than £500,000 on or after 20 March 2014. Transfers after that date but pursuant to a contract entered into before 20 March will be subject to the old rates of SDLT, namely 4% where the value is between £500,000 to £1m and 5% where the value is between £1m and £2m.
A new band of ATED for properties worth more than £1m and not more than £2m will apply from 1 April 2015. The annual charge applicable to properties in that band will be £7,000. The return for such properties will be required on or before 1 October 2015 and payment of the tax by 31 October 2015.
With effect from 1 April 2016 a further ATED band, applying to properties worth more than £500,000 but not more than £1m will be introduced. The annual charge for that band will be £3,500. We assume that similar deadlines will apply in terms of compliance.
The “ATED-related” CGT charge will be extended to properties worth more than £1m. with effect from 6 April 2015. Similar to the existing ATED-related CGT charge, the capital gain chargeable under these rules will be limited to the gain deemed to accrue after 6 April 2015.
The ATED-related CGT charge will be further extended to properties worth more than £500,000 with effect from April 2016 on a similar basis.
There are exclusions under the existing regime of legislation for companies which carry out property development or carry on lettings businesses and we assume that those same exclusions will apply at the lower levels contemplated by the proposed new legislation.
The Government is keen to deter potential taxpayers from holding UK residential property through offshore companies and see the new measures as a means of both deterring potential taxpayers from creating new offshore company structures and persuading owners of existing structures to unwind them.
As most people know one of the principal reasons why non-domiciled individuals own properties through offshore companies is to avoid an exposure to UK inheritance tax (’IHT’) since IHT is charged on assets located in the UK regardless of the taxpayer’s domicile.
Ownership of a UK residential property through an offshore company will still achieve IHT avoidance but the critical question for potential taxpayers is whether the additional tax cost is worthwhile, particularly when they need to take into account the other annual costs of maintaining the structure.
The Government has also mentioned that this draft of legislation is also designed to deter the avoidance of SDLT by potential taxpayers purchasing the shares of existing offshore companies rather than the underlying property itself. In our experience potential purchasers are rarely willing to purchase shares in an offshore company because the price generally factors in the headlined potential saving of SDLT and it is very difficult to be certain about liabilities (tax and otherwise) associated with the company.
The new legislation will make potential tax payers who own UK residential properties below £2m in value think carefully about whether they wish to continue with their present arrangements. We would be surprised if many potential taxpayers have created new company and property structures in the recent past. Whilst offshore companies do, for some, have a role in avoiding IHT, entry level in our view is above £2m. There are other means of tackling the IHT issue, such as tax-efficient wills and life cover and we would regard these as more appropriate at the level that the proposed new legislation is attempting to tackle.
Owners of existing company and property structures will need to consider carefully the broader tax ramifications if they are initially persuaded by proposed new legislation to wind up those structures.
For further information, please contact John Goodchild.