Companies based in the UK and overseas, who own residential property worth above £1m, need to consider "de-enveloping" or transferring the property out of the company name before 1 April 2015.
What is changing?
- From 1 April 2015, companies and other non natural persons who own residential property worth in excess of £1 million must pay the Annual Tax On Enveloped Dwellings (ATED). This could amount to an annual charge of up to £15,400 for properties of value up to say £5m and higher for those above this value. From 1 April 2016, ATED will be extended to residential properties valued at more than £500,000.
- Capital Gains Tax charged on a sale of such a property will be extended to apply to a foreign company or non natural person such as an offshore company, on the increase in value of the property from 6 April 2015 until the date of sale.
- Stamp duty land tax at a penal rate of 15% is charged on any purchase by a company or non natural person since 21 March 2012 instead of the usual rate of 7%
These pose tax issues for companies whether offshore or onshore. Relief is available for property developers, property traders and property rental businesses. Action needs to be considered before 1 April 2015.
Action to be taken Companies both in the UK and abroad already owning such properties, including their directors, trustees and beneficiaries should look urgently at the structure through which they own property and consider re-structuring the way in which these properties are held.
Clients purchasing residential property over £500,000 must carefully consider which name or structure to use in order to purchase the property.
Most companies or non natural persons now owning property over £500,000 will probably consider taking one of the following courses of action.
De-enveloping This means transferring the property out of the ownership of the company and moving it into personal ownership. Many people are now taking action to de-envelope. This could be done in various ways. For example, passing a resolution to put the UK or offshore company into voluntary liquidation and carrying out a distribution in specie of the property and transfer into individuals or trustees names.
Use of a trust structure Trustees should be exempt from these taxes and the property could be held directly by the trustees in trust for the beneficiaries. Individuals and other family members can act as trustees so that there is no need to use commercial trustees.
Trustees who hold UK property will be subject to a 10-year anniversary charge to tax, although the charge is only assessed on the value of the property less any debt secured by the property. Therefore it may be worth considering borrowing against the security of the property to minimise the exposure to tax.
It is likely that use of a trust structure will be a popular choice of structure which would maintain the confidentiality of the true beneficial owner, as well as bringing substantial tax benefits.
Time is short Onshore and offshore companies holding UK residential property need to review their position and take professional tax and legal advice. We can assist you in taking the necessary legal steps to re-structure your property. The interaction of the various UK taxes involved can be complicated, but through our close connections with tax specialists, we can also assist you to mitigate your tax position.