The UK Government Budget announced on 21 March 2012 (the Budget) made substantial changes to the structure of stamp duty land tax (SDLT) in the United Kingdom with immediate effect (see our earlier article for further details).


In addition, two new charges on high value residential property owned by certain “non-natural” persons were introduced and are expected to come into force from April 2013, pending further consultations:

  1. An annual tax charge (a form of “mansion tax” or “wealth tax”)

  2. Capital gains tax (CGT) on the sale or disposal of relevant property

The Government has stated that the measures are “designed to tackle avoidance and ensure that individuals and companies pay a fair share of tax on residential property”.  In particular, the Government seeks to discourage the common practice of “enveloping” residential property (i.e., purchasing property through a non-natural person) where tax avoidance may be a significant motivation.

Current Law

There is currently no annual charge or levy on residential property in the United Kingdom.  The proposed annual charge is therefore a new tax introduced to encourage those who own UK residential properties valued over £2 million in envelopes to remove the property from those envelopes.

CGT is a tax on the gain or profit made on the disposal, or deemed disposal, of capital assets such as shares or real property during a tax year (ending on 5 April).  Currently, CGT is imposed only on UK resident individuals, including UK resident companies.  However, UK residents do not usually have to pay CGT when they sell or dispose of property where it is their main home ( Principal Private Residence Relief); CGT applies mainly to second homes and investment properties. 

Non-UK residents are not currently liable to CGT on gains arising from the disposal of UK residential property.  The Government has stated that the proposal to extend CGT to residential property owned by certain non-UK resident, non-natural persons will ensure that when properties are removed from their envelope, the non-natural person will be taxed in an equivalent manner, regardless of whether they are resident in the United Kingdom or are a non-UK resident.

Annual Charge: To whom will it apply?

From 1 April 2013, a new annual charge is to be imposed on the ownership of interests in residential property valued over £2 million and owned by certain non-natural persons, defined broadly as companies, collective investment schemes and partnerships where one or more of the partners is a company. 

The application of the annual charge is therefore the same as that of the 15 per cent SDLT rate, with the same definition of non-natural persons and the same exclusions.  For example, a company owning property solely in its capacity as a trustee, rather than as a trustee of a bare trust, is excluded from the annual charge.  A property interest held by a company acting as a bare trustee will be treated as an interest of the person for whom the company is a trustee.  Charities and bona fide property development businesses are excluded from the annual charge, provided certain conditions are met in the case of the latter. 

The annual charge will apply to residential “dwellings” only, which may be all or part of a residential or mixed use property.  In particular

  • If the residential dwelling is part of a larger property including non-residential parts (e.g., a penthouse flat above an office block), only the residential part will be valued.

  • If the property consists of a number of self-contained dwellings (e.g., a block of 10 self-contained flats), each dwelling will normally be valued separately.

  • If the property comprises a main dwelling with one or more parts suitable for use as staff accommodation, the main dwelling in its entirety will be valued.

Non-natural persons owning UK property will therefore need to consider whether there is a chance they will be caught by the new rules, even where they own UK property that has only partial residential use.  

Some types of property that may otherwise satisfy the definition of residential dwelling will be exempt, including boarding school accommodation, hospitals, student halls of residence, military accommodation, care homes and prisons.

Annual Charge: Calculation of charge

The rate of the annual charge will depend on the value of the property, with properties being required to undergo valuation every five years.  The value of the property interest that will be relevant for the annual charge for the five years from 1 April 2013 is proposed to be

  • The market value of the property interest on 1 April 2012 if the interest was owned on that date.

  • The market value on acquisition if the interest is acquired later.

  • The market value on any later creation or cessation of a relevant subordinate property interest.

The next valuation will be due on 1 April 2018, at which time the relevant valuation date will be 1 April 2017.

Depending on the value of the property, property owners will be required to pay the following rates:

Click here to view table.

The annual charge will be indexed to the Consumer Price Index (CPI) and increased in April each year, based on the CPI of the previous September.  This will commence from the second year of charge, namely 1 April 2014.  For example, if the CPI in September 2013 is 2 per cent, the lowest band will be charged at £15,300 for the year commencing 1 April 2014.

A separate return will be required for each property falling under the charge.  Each return will have to contain details about the property including its full address, Land Registry title, the interest held, the beneficial owners of the property and the valuation of the property.  The first returns and payments will be due by 1 October 2013 or 30 days after Royal Assent is given if that is after 1 September 2013.

CGT:  To whom will it apply?

From 6 April 2013, CGT is to be extended to gains on the disposal or part disposal of residential property by non-UK resident, non-natural persons where the consideration exceeds £2 million.  This will include the grant of any options over such property, as well as the sale of shares in a company where more than 50 per cent of its value is derived from the UK residential property.

The definition of “non-natural persons” is wider for CGT purposes than it is for the annual charge as it catches broadly any entity that is not an individual.  This will include non-UK resident companies, trustees (excluding bare trustees but including trustees who are themselves individuals), collective investment vehicles, clubs and associations, personal representatives and “entities which exist in other jurisdictions that allow property to be held indirectly”.

However, Principal Private Residence Relief is likely to be available to trustees and personal representatives where the beneficiary is in actual occupation of the property as their main home.  A non-UK resident charity that would meet the conditions for CGT exemption if it were UK-resident will continue to be exempt.

The definition of residential property for these purposes will follow the meaning of “dwelling” that is applied for the annual charge (see above).  The CGT regime will apply irrespective of the use to which the residential property is put: it will apply to commercially let residential property and property owned by an employer to provide accommodation for its employees or directors.

CGT: Calculation of gains

The new rules will apply to the total gain accrued during ownership of a property and not only the gain accrued post April 2013.  Consequently, it may be tax efficient to sell or trigger a rebasing of relevant UK property in advance of the new rules being introduced.

Losses arising on disposals of UK residential property in circumstances where tax would be chargeable had a gain accrued will be available to offset only against gains on disposals of UK residential property in the same or future years.

The applicable rate(s) of CGT will be announced in the 2013 Budget and may not necessarily be the same as the current main CGT rate of 28 per cent. 

Future Developments

The Government consultation on the new annual charge and CGT for non-UK resident, non-natural persons is still at a relatively early stage and will close on 23 August 2012.  A response to the consultation is due to be published by the Government in the autumn.  Draft legislation is due to be published for further consultation shortly thereafter, before being introduced in the Finance Bill 2013.  This means that the new charges as set out above may change before they come into force.

In the meantime, non-natural owners of high value UK residential property need to consider two essential points of action before the rules come into force in April 2013.

First, they should ensure that a valuation is arranged and carried out before the proposed annual charge comes into effect on 1 April 2013.  Non-natural property owners will need to determine whether they come within the new charge and, if they are in any doubt, obtain a valuation report (from a suitably qualified valuer of real estate) for their property as of 1 April 2012.  While self valuation is permitted, it would not protect the tax payer from possible penalties where the property is found to have been undervalued significantly.

Second, they should remind themselves of the reasons why the relevant property was originally purchased by a company or other non-natural person and whether those reasons are still valid.  The possibility of an annual charge and/or CGT liability may seem somewhat onerous, but it may be insignificant or tolerable when balanced against other tax or commercial implications of de-enveloping, such as the loss of inheritance tax protection or privacy.