13 February 2013
On the 5th December 2012, the Chancellor delivered his Autumn Statement. A week later the draft clauses for the Finance Bill 2013 were published. Notable by its absence was the draft legislation for the extension of CGT to non resident non natural persons (the “extension to CGT”), which had been heavily anticipated. Instead we were promised that the draft clauses would be released in early January 2013.
As you will recall, the extension to CGT was the second prong to the Chancellor’s attack on what HM Treasury felt was unacceptable SDLT avoidance using companies to hold residential properties. The first prong of course was the Annual Charge (now renamed the Annual Residential Property Tax or “ARPT”).
Much has been written on the ARPT (see Briefing Notes passim) and we don’t intend to go into the technical detail of ARPT again; the focus of this Note is the extension to CGT and determining who needs to consider an immediate restructure.
The Scope of the Extension to CGT
As you may recall, the original condoc on the changes to the taxation of high value residential property proposed that the extension to CGT would encompass a greater class of persons than the ARPT. We, in our response to the condoc and along with many others, queried the rationale behind this move and questioned how such an extended scope would achieve the Government’s stated aim.
We are pleased to see that these comments have been taken on board and that the extension to CGT is now specifically targeted at those persons who fall within the scope of the ARPT.
One interesting point to note, however, is that the original proposed extension to CGT was targeted at non resident non natural persons. The decision to tie the extension to CGT to the ARPT as per the current draft legislation now means that the extension to CGT is to apply to both resident and non resident non natural persons equally.
The extension to CGT has therefore mutated into a new branch of CGT focused solely on disposals of high value UK residential property by non natural persons. This is discussed further below in the technical section.
Of primary interest to most taxpayers and professionals is whether they are caught by the new legislation and, if so, whether they should restructure their property holdings so we have looked at this first and postponed the technical analysis to the final sections.
Prima facie, the ARPT and the extension to CGT now both apply, irrespective of residence, to:
- Partnerships with a corporate partner; and,
- Collective Investment Schemes.
Note however, that corporate trustees acting in their capacity as trustees are not caught nor are corporate nominees acting as bare trustees.
The draft legislation does contain specific carve-outs for the following activities:
- Property Rental Businesses – so long as a non-qualifying person cannot occupy the property and where a non-qualifying person is, broadly speaking, anyone connected with the structure;
- Dwellings open to the Public – so long as there is a commercial trade and the property is open to the public for a minimum of 28 days per annum;
- Property Developers – so long as a non-qualifying person is not entitled to occupy the property. It should be noted that there are considerable supplementary provisions which need to also be considered but which we cannot cover in this note due to space constraints;
- Property Traders – so long as part of a commercial business and a non-qualifying person cannot occupy the property;
- Financial Institutions which acquire property interests in the course of their normal lending business;
- Occupation by Employees/Partners – so long as there is a commercial trade, the property is made available for the purposes of that trade and the employee/partner holds < 5% interest in the company/partnership;
- Farmhouses – so long as there is a commercial farming trade and the farmer occupies the property.
If the property falls within one of the specific reliefs above, then it is likely that neither the ARPT nor the extension to CGT will apply.
If the property is owned by a company, partnership (with a corporate partner) or a CIS and is not within the specific reliefs listed above, then you need to consider whether to restructure now, if you have not already done so.
You should note that if the relief does not apply for the whole period of ownership post April 2013 then there will be ARPT and associated CGT issues. This is discussed below in the section on the Rebasing Election. If this is anticipated, it may be worthwhile considering whether to restructure the holding now.
How the Extension to CGT Works
As mentioned above, the extension to CGT has mutated away from focusing on non resident non natural persons (“NNP’s”). The draft legislation targets both resident and non resident NNPs disposing of high value UK residential property equally.
This does pose an interesting problem in respect of UK resident companies which are already within the charge to corporation tax on gains. We shall look at this further below in the section on the Rebasing Election.
The draft legislation is written in such a way as to introduce a stand alone CGT charge on “ARPT-related gains”. Such gains can broadly be summarised as being gains on property which has been within the charge to the ARPT and where the consideration on disposal is over £2 million.
The headlines of the charge are as follows:
- The relevant tax rate on ARPT-related gains is 28%, in line with the standard CGT rate;
- ARPT-related losses can only be utilised and carried forward against other ARPT-related gains i.e. ring-fenced losses;
- There are provisions to provide a tapering effect for disposals around the £2m threshold (otherwise it would be more tax efficient to dispose of the property for less than £2m and not pay the tax);
- The anti-avoidance provisions at s.13 TCGA are turned off in respect of ARPT-related gains meaning that the company will pay the CGT and no gain is apportioned up to the shareholders;
- Indirect disposals (i.e. where the company is sold and not the property) are no longer caught;
- The no-gain/no-loss provisions at s.187 TCGA (for intra-group transfers) are turned off meaning that a CGT charge crystallises on disposal.
The Rebasing Election
The draft legislation is framed in such a way that there is an automatic rebasing of the cost of the property to open market value at 6th April 2013 unless the taxpayer elects otherwise.
Thus, in the absence of an election, the property value is rebased to its market value as at 6th April 2013. Any gain on a disposal occurring post 6th April 2013 will therefore be split into two parts:
- The ARPT-related gain – subject to the new CGT charge; and,
- The non ARPT-related gain – subject to “normal” (i.e. current) rules.
Thus in the case of a UK company making a post April 2013 disposal of a high value property which is within the scope of the ARPT, part of the gain will be charged to corporation tax with the remainder charged to CGT (see example below).
As a general rule, the ARPT-related gain will equal the post April 2013 gain and the non ARPT-related gain will equal the pre April 2013 gain.
However, this will not always be the case as there is an added complication for properties which drift in and out of the ARPT (either due to falling in or out of a relief or due to fluctuations in value). This arises from how ARPT-related gains are defined.
Broadly speaking as the new CGT charge only applies for periods when the ARPT regime applies, it is possible to have the post April 2013 gain apportioned into an ARPT-related gain and a non ARPT-related gain.
This will happen where a property is not within the ARPT for the full period of ownership post April 2013.
This is best illustrated with an example for a UK company (very hypothetical and ignoring any indexation allowance):
If the election is made (which is irrevocable) then there is no rebasing to the market value at 6th April 2013 and as a general rule the whole gain is likely to be within the charge to ARPT-related CGT.
However, if the property is not within the ARPT regime for the whole period of ownership post April 2013 there will be a corresponding apportionment similar to that above meaning a portion of the gain will be taxed under the new CGT regime and a portion taxed under “normal” rules.
The ARPT comes into effect from 1st April 2013 while the extension to CGT is effective as of 6th April 2013. If you think you are caught by the changes you need to consider restructuring immediately.
To date we have been involved in a number of restructurings with a cumulative property value of c.£60 million. Contact us today to discuss your options.
Telephone: + 44 (0) 20 30088 102
Telephone: + 44 (0) 20 30088 105
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