Taxation of High Value Residential Property
The Budget on 22nd March 2013 proposed a new annual charge and an extension of Capital Gains Tax to certain ‘non-natural persons’ owning residential property with a value in excess of £2 million, alongside an increase in the stamp duty land tax (“SDLT”) rates.
Finance Act 2013 was granted Royal Assent on 17th July 2013 with little significant amendment to the new tax charge, now known as the ‘Annual Tax on Enveloped Dwellings’ (“ATED”). ATED became effective from 1st April 2013.
In addition, where ATED applies, ATED related Capital Gains Tax (“ATED related CGT”) is chargeable on any gains arising and accruing after 5th April 2013 where the consideration exceeds £2 million.
Annual Tax on Enveloped Dwellings (“ATED”)
The ATED is applicable where the following three conditions are met.
1) A “non natural person” such as a company, partnership or collective investment scheme is beneficially entitled to the interest in the property
2) The interest is a “single-dwelling interest” and
3) The interest has a “taxable value” greater than £2 million.
This is an annual tax charge calculated by reference to chargeable periods commencing 1st April 2013 and ending on 31st March 2014 and annually thereafter.
The annual tax charge is as follows:
Taxable value of interest in property
Annual Chargeable Amount
£2,000,001 – £5,000,000
£5,000,001 – £10,000,000
£10,000,001 – £20,000,000
The taxable value is the market value at the date of acquisition or if later on 1st April 2012, and thereafter the market value every 5 years from 1st April 2012.
The annual chargeable amount is pro-rated if the charge is not applicable for the entire chargeable period.
The person liable for the tax is the company, the “responsible partners” or the trustee of the collective investment scheme. Liability of partners is joint and several and joint owners of a single interest dwelling are jointly and severally liable.
There are provisions for various reliefs which are intended to mirror the changes to the SDLT provisions, so if a taxpayer is within the 15% rate of SDLT on the property acquisition then they are likely to be within the scope of ATED and vice versa.
There are exemptions for corporate trustees, nominee companies, bare trusts, charities, public bodies and dwellings which have been granted conditional exemption from IHT.
The legislation also gives relief to non-natural persons engaged in the business (with a view to a profit) of letting, trading in, developing or redeveloping properties. Although this relief is not available if certain “non qualifying persons” occupy the property (broadly persons connected to the beneficial owner).
There are also reliefs available for property used in a qualifying trade, or where it is provided to certain employees (including farmhouses) subject to meeting conditions.
ATED Returns and Payment
ATED returns must be submitted and ATED paid by 30th April each year. However, for the first year only, the return will be due by 1 October 2013 and payment will be due by 31 October 2013.
This will mean that those caught by the ATED regime will be required to make two ATED payments in quick succession in respect of the first two years. Care should also be taken when considering how ATED payments are to be made in order to ensure that this does not result in unintended tax consequences in respect of the funds brought to the UK in order to pay the charge.
It should be noted that the return is completed at the beginning of each chargeable period and so if a taxpayer has claimed relief (in advance) but circumstances change such that the relief ceases to be available, the taxpayer is required to amend the ATED return within 90 days of this occurrence.
Structures which are not a ‘non-natural person’ are not required to complete an ATED return. However a non-natural person eligible to claim a relief is obliged to complete a return in order to claim any of the reliefs mentioned above.
We are able to prepare returns and advise on the availability of reliefs. In some circumstances the payment of the tax can create a taxable remittance. We can advise to ensure that funding the payment of the ATED does not result in any unforeseen tax consequences.
ATED Related CGT
The extension of CGT applies solely to disposals of high value UK residential property by “non natural persons” whether resident or non-resident in the UK, i.e. those falling within the ATED charge detailed above.
The tax rate on ATED related gains is 28%, in line with the current standard CGT rate.
ATED related losses can only be utilised and carried forward against other ATED related gains.
There are provisions to provide a tapering effect for disposals around the £2 million threshold to ensure that it is not more tax efficient to dispose of the property for less than £2 million.
Where the anti-avoidance provisions attributing gains to shareholders (s.13 TCGA 1992) could also apply, these provisions are ignored and ATED related CGT will be charged instead.
There is an automatic rebasing of the cost of the property to the open market value at 6 April 2013, unless the taxpayer elects otherwise.
Therefore any gain on a disposal post 6 April 2013 will be split into two parts:
- The ATED related gain – subject to the new CGT charge; and
- The non ATED related gain – subject to the old rules.
As a general rule, the ATED related gain will equal the post April 2013 gain and the non ATED related gain will equal the pre April 2013 gain.
However, it is more complicated for properties which drift in and out of the ATED charge (either due to falling in or out of a relief or due to fluctuations in value) as the CGT charge only applies for periods when the ATED regime applies, meaning that gains have to be apportioned accordingly.
What does this mean for our clients?
Every situation is different and so there is no one easy answer. If you have not already done so, professional advice should be sought.
Broadly speaking, an offshore structure owning UK property still provides the owner with protection from UK Inheritance Tax and so retaining the structure may be prudent if the Inheritance Tax saved is more valuable than the likely future ATED charges and ATED related CGT. However, you may wish to consider whether other IHT planning methods could be cheaper.
If the structure holding the property falls within one of the exemptions or is eligible for relief, or, can be rearranged so that it does, this may be a sensible course of action.
If you are contemplating purchasing a new property, personal ownership for occupation by an individual with some IHT planning is often the simplest and cheapest option. A bare trust or nominee company may be added for anonymity. Alternatively, a direct purchase by the corporate trustees of an offshore trust may also provide an element of asset protection providing the IHT exposure is carefully managed.
If you think you might be caught by the ATED or require assistance with the preparation of a return, please contact us for advice on your next steps.
|Telephone +44(0)20 3008 8102||Telephone +44(0)20 3008 8105|
|Email: email@example.com||Email: firstname.lastname@example.org|