Proposed CGT charge on disposals of UK residential property held by non-resident non-natural persons
Existing structuring
Future planning
Well before the announcement of the Budget on March 21 2012, Chancellor George Osborne had announced his intention to address the issue of perceived avoidance of stamp duty land tax in relation to the purchase of high-value UK residential properties through companies. The broad scope of the tax changes and proposals in this area was not anticipated, however. They include a new 15% rate of stamp duty land tax for residential properties over £2 million when purchased by "non-natural persons" - this new rate applies with effect from March 21 2012 - and a consultation on the introduction of a "large" annual charge on residential properties valued at over £2 million owned by non-natural persons.
Proposed CGT charge on disposals of UK residential property held by non-resident non-natural persons
The Budget also saw the announcement of a significant amendment to capital gains tax. The UK capital gains tax regime is to be extended to include gains on the disposal of UK residential property and shares or interests in such property by non-resident, non-natural persons. This may be at a personal capital gains tax rate (potentially 28%), rather than the lower corporation tax rates. This change is intended to take effect in April 2013, following consultation on the details of the measure.
As with most of the proposed new rules on stamp duty land tax, the new scope of capital gains tax need not upset well-planned purchases. However, it will be important to consider the likely effect of the change.
Under the existing rules, capital gains tax is levied according to the residence and domicile status of the taxpayer, not in relation to the source of the gain or the situs of the property on which it is realised. Those who have been non-resident for five years or more have generally been exempt. The proposed charge therefore represents a significant departure from this principle - albeit a limited one at present.
In certain circumstances, existing anti-avoidance rules attribute the gains of offshore companies to UK resident shareholders or UK resident settlors and beneficiaries of offshore trusts that hold such companies. However, in many such situations tax can be avoided by careful planning.
The Budget documents give very little detail about the proposals. There is no indication that the capital gains tax charge will be restricted to properties over a certain value; nor is it clear whether the definition of 'non-natural persons' will be the same for capital gains tax and stamp duty land tax purposes(1) or whether, for example, non-UK trustees may be caught, as appears to be likely. The consultation due to be published later in May 2012 will no doubt provide clarification.
Offshore corporate ownership structures, which may also involve offshore trusts, are usually established by individuals who are domiciled outside the United Kingdom or deemed to be so for inheritance tax purposes, having been resident in the United Kingdom in fewer than 17 of the previous 20 tax years. Some will also be resident outside the United Kingdom. For such individuals, there may be significant inheritance tax advantages in owning UK property through such structures, as property that is situated outside the UK - for example, shares in an offshore company, owned by an individual who is domiciled or deemed to be domiciled outside the United Kingdom, or in which such an individual is interested - is not liable for inheritance tax.
At present, a purchaser of shares in an offshore company which owns a UK property avoids a charge to stamp duty land tax (5% on a property worth over £1 million at pre-Budget rates), paying no stamp duty if the company is incorporated outside the United Kingdom, the share register is held outside the United Kingdom and the share transfer is executed abroad. This is the mischief that the Budget ostensibly seeks to target, but instead of imposing a stamp duty land tax charge on transfers of shares in property-owning companies, the Budget has sought to discourage residential property being transferred into corporate vehicles by imposing a 15% 'entry charge'.
Together with a proposed annual charge on residential properties valued at over £2 million and held by certain non-natural persons, the measures amount to a three-pronged attack on the purchase and ownership of UK residential properties through corporate vehicles, whether offshore or onshore. A 15% rate of tax on the purchase price of a residential property, although significant, may still be regarded as an acceptable cost for the inheritance tax advantages inherent in such a structure, not to mention the confidentiality aspect which some individuals may appreciate. However, the proposed annual charge or a capital gains tax charge on a future transfer of such a property may tip the balance for many towards direct ownership of UK residential property, perhaps purchased with a mortgage to reduce the value of the UK property in a non-domiciled individual's estate. There are other planning possibilities to mitigate the inheritance tax risk where the property is held by individuals.
For further information on this topic please contact Anthony Thompson at Lawrence Graham LLP by telephone (+44 20 7379 0000), fax (+44 20 7379 6854) or email ([email protected]).
Endnotes
(1) For example, for the purposes of the new 15% rate of stamp duty land tax that applies to purchases of a single dwelling for more than £2 million, the term 'non-natural person' refers to companies, collective investment schemes (including unit trusts) and partnerships in which a non-natural person is a partner. However, there is an exclusion (with conditions) for property developers.