The Budget 2012 saw the Chancellor announce a raft of measures targeted at tax avoidance on valuable residential properties. We had a new 7% rate introduced for residential properties worth over £2 million and a new super rate of 15% for any such properties “enveloped” by non natural persons.
Despite the rhetoric about “fair taxation” it has quickly become clear that the 15% rate is there to act as a deterrent to prevent future enveloping. And for those who have already engaged in “morally repugnant” (the Chancellor’s words not ours) tax avoidance there will be an Annual SDLT Charge and an extension to Capital Gains Tax (“CGT”) implemented with effect from 6 April 2013.
Although not retrospective legislation in the true sense, both the Annual Charge and the extension to CGT are certainly retroactive in their conception, specifically designed to catch transactions that have taken place many years before. And yet the Chancellor still insists in draping them in the clothes of “fair taxation”.
The icing on the cake was the threat of real retrospective legislation should further “abuses” be identified. Whether retrospective legislation can ever be said to be “fair” is highly doubtful but such is the current climate we live in.
When the Chancellor announced the Annual Charge and the extension to CGT we speculated that they didn’t have any real plan on how to implement it. They promised the Consultation Document in May and waited until the eleventh hour to publish it under the title: Ensuring the Fair Taxation of Residential Property Transactions.
What about the measures themselves?
The Annual Charge
It is intended that the Annual Charge will apply to residential property valued at over £2million owned by non natural persons.
The definition of residential property will follow that used for the 15% super rate i.e. “single dwelling”.
Likewise the definition of non natural person will follow that of the 15% super rate i.e. companies, partnerships with a corporate partner and Collective Investment Schemes.
The exemption for corporate trustees holding residential property in trust remains, as does that for property development businesses operating for 2 years where purchase is with the intention of redevelopment and resale.
However, this latter exemption may be subject to change depending on the responses to the Consultation. Especially contentious is the 2 year requirement as many property developments are structured through newly formed companies even though the developer itself may be of longstanding.
The £2million threshold is intended to be valued every 5 years. The first valuation date is proposed to be 1 April 2012 and will apply from 2013 to 2018. While the proposed system is self assessment, reading between the lines it is clear that HMRC will expect professional valuations to be undertaken and they are proposing a clearance system for valuations.
The proposed rates are as follows:
|Property Value||£2m to £5m||£5m to £10m||£10m to £20m||£20m +|
The Extension to CGT
The proposed extension to CGT is specifically aimed at disposals of residential property by non natural persons. Non resident individuals are not within the scope.
The definition of residential property will follow that of both the Annual Charge and the 15% super rate.
However, it appears that the definition of non natural person will not accord with the Annual Charge definition! So if these provisions are implemented as described above, it will be possible to be caught by the CGT extension but not the Annual Charge.
The extension is aimed at disposals where the consideration is £2million or more and is set to capture both disposals and part disposals. Importantly it is also intended to catch any disposals of assets which take more than 50% of their value from underlying UK property.
We were unsure as to how the Government intended to implement the CGT extension where the shares in a non resident company were sold. The Consultation is silent on how this will be enforced. If a non resident individual A sells shares in a non resident company B to a non resident individual C it is hard to see how this will work in practice.
Gains will be calculated in the normal way i.e. in line with current CGT concepts. There is no relief for gains accrued prior to 1 April 2012 (April Fools’ Day).
The rate of tax is yet to be determined and importantly is not part of the Consultation!
And as we commented before, the interaction with the existing anti-avoidance legislation is going to be a very complex matter. Helpfully the Consultation does not even address it except to say that it will be considered as part of the policy development. We should hope so!
What Should I do Next?
It is important to stress that this is only a Consultation and while it does give us a flavour of where the Government is going it is by no means definitive. The window for responses closes in August and we would expect draft legislation to appear in the Autumn.
If you are caught by the proposals in their current form then you should speak to an advisor now to be in a position to restructure come the Autumn. It is important to note that there are options available even if it means collapsing the structure and putting the property back into individual ownership. The main concerns arising from individual ownership for non doms are anonymity and IHT but rest assured there are other tools available to mitigate both.
Should you have any queries concerning the points mentioned above or would like to discuss any oother aspect of the Consultation, please do not hesitate to contact us for specific advice.
|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.