14th December 2012
Taxation of High Value Residential Property
The Budget on 22 March 2012 included 3 announcements relating to UK residential properties worth more than £2m.
1. Increased SDLT rates with immediate effect.
2. A proposal for an “Annual Charge” on “high value” properties held by “non-natural persons”, now referred to as the Annual Residential Property Tax (“ARPT”).
3. A proposal that Capital Gains Tax would be applied to certain non residents.
Draft legislation in respect of the extension of Capital Gains will be issued in late January 2013 (after further consultation, closing date 18th January 2013).
1. SDLT changes
|Residential Property Value||SDLT Rate|
|Less than £125,000||0%|
|£125,001 – £250,000||1%|
|£250,001 – £500,000||3%|
|£500,001 – £1,000,000||4%|
|£1,000,001 – £2,000,000||5%|
|£2,000,001 + purchased by individuals||7% from 22nd March 2012|
|£2,000,001 + purchased by non-natural persons||15% from 21st March 2012|
The rates above are chargeable on residential property, that is, “a building that is used or suitable for use as a dwelling, or is in the process of being constructed or adapted for such use”. However, the 7% and 15% rates do not apply to non-residential or mixed use properties. Furthermore, these rates are not applicable if 6 or more dwellings are the subject of a single transaction.
Non-natural persons (“NNPs”) to which the 15% applies, are companies, UK and non-UK partnerships with a corporate member, or collective investment scheme. Corporate trustees are exempt from the 15% charge if they are purchasing the property directly. Nominees and bare trusts are also exempt.
The draft legislation gives much broader relief (but only with effect from the date of Royal Assent) to property related businesses than originally anticipated. NNPs engaged in the business (carried on with a view to a profit) of letting, trading in, or redeveloping properties will not be subject to the 15% rate. This relief is not available if certain individuals connected to the NNP occupy the dwelling.
There are also reliefs available for property used in a qualifying trade, or where it is provided to certain employees (including farmhouses) but there are requirements for public access to the property if used in a trade, and ownership and employment requirements for the employee accommodation reliefs.
If relief for the higher rate of SDLT was claimed, it may, in certain circumstances may be withdrawn if the relevant conditions fail to be met within the three years following the acquisition of the interest. The balance of the SDLT is then payable along with interest but no penalties will be charged.
If none of the reliefs are available, the use of NNPs may still be useful for certain clients if they act as nominee or bare trustee. This option may be of interest to clients who prefer personal ownership, but require a nominee for reasons of confidentiality.
2. Annual Residential Property Tax (“ARPT”)
The ARPT is applicable to property ownership situations where the following three conditions are met.
1) 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 m.
This is an annual tax charge calculated by reference to chargeable periods commencing 1 April 2013 and ending on 31 March 2014 and annually thereafter.
The annual tax charge is as follows:
|Taxable value of the interest in property||Annual chargeable amount|
|£2,000,001 to £5,000,000||£15,000|
|£5,000,001 to £10,000,000||£35,000|
|£10,000,001 to £20,000,000||£70,000|
The taxable value is the market value at the date of acquisition or if later on the 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.
The draft clauses include provisions for various reliefs. They are intended to mirror the SDLT provisions detailed above, 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 ARPT, and conversely if they are not within the 15% rate by virtue of one of the reliefs, then they are unlikely to be within the scope of ARPT. It is imperative however that in order to be eligible for the ARPT relief, the person who holds the interest must also carry on the business.
ARPT returns must be submitted within 30 days of the beginning of the chargeable period, i.e. usually by 30th April. This is also the date on which the ARPT must be paid, although for the first year, there is a 6 month extension to 30th October 2013.
Note that this return is being 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 to him, the taxpayer is required to amend the ARPT return within 90 days of this occurrence.
3. Extension of the Capital Gains Tax (“CGT”) regime
Incorporation of an extended CGT regime into the existing CGT legislation will be a feat of drafting. It is not surprising therefore that there has been a delay in publication until January 2013. However, it seems certain (subject to the drafting being achieved) that CGT at 28% will be payable on gains arising on the disposal of high value (i.e. over £2m) residential property by certain non-resident NNPs from 6 April 2013. Furthermore, this charge is intended to take priority over other CGT charges (e.g. s87).
It appears that the extended CGT regime will not apply to indirect holdings of interests in residential property held by non-resident non-natural persons, but there is a possibility that it could be extended to UK resident NNPs.
The tax charge on the NNP is intended to have effect only for those gains accruing after 6th April 2013 and so it may be that valuations at that date are required as part of a rebasing exercise. We await further details of this option in the draft legislation. Note however that even if the NNP pays CGT on a rebased gain, the full gain may still be available to be imputed to UK resident shareholders or beneficiaries (i.e. s13 and s87). The FB 2013 revisions to s13 may be helpful here.
The £2m threshold is not expected to be indexed, and so assuming upward growth in property prices, fiscal drag will mean more and more properties will fall within this charge, although providing the property was valued at less than £2m in April 2012, any growth in the property value (assuming no change in ownership) can be disregarded until April 2017.
The NNPs to whom the CGT regime applies will largely correspond to those that are subject to ARPT. As with ARPT, CGT will not apply to disposals by trustees, genuine property businesses, charities and businesses disposing of employee accommodation. There will be some exceptions in the treatment of certain entities between the two taxes. Further guidance on this point is expected in early 2013.
Partnerships will be transparent for the purpose of computing chargeable gains with each partner as usual, treated as independently disposing of their own capital share in the partnership asset, resulting in a separate gain for each partner. Partners who are trustees or individuals will not be chargeable. However, the £2m threshold will apply to the whole property, not to each partner’s share.
Responding to fears about the effect on the property market around the £2m mark, as well as the likely effects on taxpayer behaviour, the Government plant to introduce a marginal / taper relief which aims to avoid the otherwise inevitable ‘cliff-edge’ effect on properties valued around £2m tax and to avoid people selling properties at just below £2m. The relief will work in a similar way to marginal relief on chattels. In these situations, the relief will reduce liability to CGT to ensure that sellers will be in a
better financial position even after paying the tax, than if they had sold for just under £2m and avoided the tax.
To prevent abuse, there will be anti-fragmentation rules to prevent property being sold in a number of separate transactions to avoid tax (or to suppress the total consideration received). Generally speaking, HMRC will accept that the value (for the £2m test) is equal to the consideration received, except where the disposal is between connected persons or there may have been manipulation of value. In these situations, market value will be applied.
Losses on high value residential property will be allowable, but this will be capped so that the loss is restricted to the difference between the purchase price and £2m. Any such losses are only able to be set against other gains on high value residential property.
Private Residence Relief will not be available to non-natural persons subject to the extension of CGT.
4. What this means for our clients
Each circumstance is going to be different and so there is no one easy answer. Professional advice should be sought in every situation.
Broadly speaking, if the IHT protection garnered from the offshore company owning the property is of more value than the likely future ARPTs, retaining the structure may make prudent. However, you may wish to consider whether other IHT planning methods, such as life insurance and/or bank borrowing would be cheaper than funding the ARPT.
If the structure holding the property now falls within one of the exemptions, or, if you can rearrange matters so that it does fall within the exemptions, this may be a sensible course of action. e.g. if a beneficiary is living in a trust property, consider bringing this arrangement to an end, and letting the property commercially to an unconnected person.
If you are contemplating purchasing a new property, generally speaking, personal ownership for personal occupation by an individual with some IHT planning is likely to be the simplest and cheapest option for most. A bare trust or nominee company may be included for anonymity. Alternatively, purchase by corporate trustees will not only provide anonymity but also may provide an element of
wealth protection. The IHT exposure can be managed in other ways.
Finally, if the property is to be let out, then a corporate structure may be the preferred route, providing that the lettings relief exemption is fully available. Such a structure may benefit from delaying the purchase until after Royal Assent to access all the available reliefs.
It must be borne in mind that the matters referred to above are based on draft legislation which can change as it progresses through Parliament.
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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.