These days the Budget seldom seems to pass without at least one sacrificial lamb offered up to appease the masses. In the past few years we’ve had attacks on non domiciliaries and high earners (read bankers). This year it was the turn of Stamp Duty Land Tax (“SDLT”).
Media reports on SDLT avoidance techniques rose steadily between October and March affording some publications the opportunity to publish balanced headlines such as Super-rich dodge stamp duty while families pay tens of thousands. Cue a picture of some big houses owned by foreigners and everyone felt outraged.
Of course, not much mention was made of the fact that middle England was also trying to avoid SDLT like the plague. Tax mitigation, it seems, is only bad if you’re wealthy!
But in our view SDLT was not the main target of these measures. The main targets are common Capital Gains Tax (“CGT”) and Inheritance Tax avoidance techniques using offshore vehicles and this is discussed further below.
The measures relating to residential property
The Government announced 4 major changes:
-A new 7% rate for residential property worth over £2 million effective immediate;
-A new super rate of 15% for any single dwelling” worth over £2 million which is purchased by a non natural person effective immediately;
-A new Annual Charge a “wealth tax” if you will, on residential property already held by a nonnatural person. We are expecting a consultation on this in the summer and legislation in Finance Act 2013; and,
-Changes to the CGT rules to bring capital gains realised by non resident non natural persons on residential property within the scope of CGT. Again we are expecting a consultation on this over the summer and legislation to be introduced in Finance Bill 2013.
What do the changes mean for me?
The first two bullets are prospective measures so won’t affect property already owned by a company. They will affect you if you are thinking of purchasing a property through an offshore company in the future.
However, the planned changes to impose an Annual Charge and CGT on disposal are cause for concern for properties already in a structure.
The temptation is to wait and see but we do not think this is the correct approach. Offshore companies holding UK residential property should consider restructuring before 5th April 2013.
While we are currently awaiting the consultation documents, there is no doubt that now is the time to get your house in order, so to speak. Depending on the exact wording of the provisions, planning options include:
-Generating an uplift in the base cost for CGT purposes and so reduce any future gain should the government press ahead with its plans;
-Restructuring the property holding into a structure outside of the Annual Charge;
-Disposal of the property.
In order to be in a position to move fast when the draft legislation is published, you should speak to us today about your specific circumstances.
1. What UK property is affected by the SDLT changes?
The newly introduced 7% SDLT rate is aimed at UK residential property with a value in excess of £2 million. The 15% super rate of SDLT is aimed at single dwellings but only applies if the purchaser is a non natural person. The Annual Charge is presumably also targeted at single dwellings which are already owned by a non natural person.
2. What is a non natural person?
The draft legislation defines the following as non natural persons for the purposes of SDLT:
-Collective Investment Schemes (CIS); and,
-Partnerships where a partner is either a CIS or a Company.
There are two exclusions from the higher charge, firstly for companies acting in their capacity as trustee to a settlement, and for bona fide developers who meet the qualifying conditions.
3. What does it mean when they say the property is valued at £2 million plus?
For the purposes of the 7% and 15% SDLT rate, it means that the chargeable consideration (the selling price) for the property is £2 million plus.
For the Annual Charge, it is not clear yet whether the legislation will look at the historic value when the property was purchased by the non-natural person or whether they will look at the current value.
4. Is the 7% rate or the 15% rate retrospective?
No, they are only targeted at transactions which occur after 21 March 2012. The Annual Charge is the Government’s attempt to catch those residential properties already owned by non resident non natural persons.
5. What is a dwelling?
The draft legislation contains a brief definition of what constitutes a dwelling for the purposes of the 15% super rate. In summary a building or part of a building counts as a dwelling if it is used or suitable for use as a single dwelling or is in the process of being constructed for such use.
6. What if a company purchases a block of flats? Are they valued collectively or individually?
Whether the 15% super rate will apply will depend on the values of the individual flats. The draft legislation contains specific rules on how to deal with transactions involving several property interests.
How exactly this will be treated for the Annual Charge is as yet unknown.
7. What do we know about the proposed Annual Charge?
Very little as of yet. We did not think the Government had an sensible idea on how to tackle this and the fact that they are not in a position to publish even a broad description of the mechanics suggests to us that this is a sop to the media attention.
HM Treasury’s costings provide the following estimates of the Annual Charge:
|Property Value||£2m to £5m||£5m to £10m||£10m to £20m||£20m +|
8. What do we know about the extension of CGT?
It is proposed that CGT be extended to catch gains:
· Realised by a non resident, non natural person;
· On the disposal of UK residential property or the disposal of shares in a non natural person.
The origin of this proposal is unknown. There is already extensive anti-avoidance legislation in place to tax such gains. We can only speculate that it came about as an afterthought to the Annual Charge.
The fact that (again) there seems to be no plan for implementing this charge is an irresponsible move by the Government generating a great deal of uncertainty in what is already a fragile market place.
9. What should I do now?
Contact us today to discuss your options. The consultation document will be published soon and any restructuring to navigate the changes will need to be implemented in good time.
|Telephone: + 44 (0) 203 0088102|
View the PDF here.
This bulletin is intended to provide general information only and is not intended to constitute legal, accounting, tax, investment, consulting, or other professional advice or services. Before making any decision or taking any action which may affect your tax or financial position, you should consult a qualified professional adviser.