'Enveloped' residential property

SDLT: the 15% SDLT rate (introduced in March 2012) is to be amended with a number of new reliefs for property businesses but these will not come into force until the Bill is enacted next summer. The reliefs are for:

  • genuine property rental, property development and property trading businesses (and the relief for property developers is much broader than in the previous legislation)
  • businesses that make dwellings available to the public for at least 28 days each year
  • dwellings occupied by certain employees or partners in a business ; and (iv) qualifying farmhouses.

Annual Residential Property Tax: from 1 April 2013, a new tax will be levied on non-natural persons (i.e. companies, partnerships with a corporate member and collective investment schemes) which own a UK dwelling worth more than £2 million. Again there are a number of reliefs, broadly similar to those mentioned above, but these will be proportionately withdrawn if the purpose for which the property is held changes during the year. Returns and payment will usually be due annually on 30 April, but for the first year returns will be due on 1 October 2013 and payment by 31 October 2013. The charge will range between £15,000 and £140,000 p.a. depending on the value of the property and which of the bands it falls within.

Capital gains tax: the scope of CGT will be extended from April 2013 to include disposals by non-resident non-natural persons of £2m+ UK residential property.The legislation will not be published until early 2013 but the charge is not now expected to apply to non-resident trusts. CGT will be charged at 28% and, importantly, will apply only to that part of the gain that accrues on or after 6 April 2013. It is also proposed that the reliefs which are to apply to the ARPT will also apply to the CGT charge. Unexpectedly, the government is considering extending the CGT regime to disposals of £2m+ residential property by UK resident non-natural persons, meaning that UK resident companies would pay tax at a higher rate than they do at present under corporation tax.

Clients with UK homes in a corporate structure caught by any of these measures should seek urgent advice on action they should consider before next April. We are producing a more detailed briefing on the basic options and if you would like a copy of this when it is available, please email your usual Boodle Hatfield advisor.

Statutory residence test

The long awaited Statutory Residence Test is nearing completion and will finally be introduced from 6 April 2013. Individuals will be able to determine their residence status by applying a relatively straightforward tick box style test to their particular circumstances. If you meet certain criteria you can either be automatically non-resident or automatically resident and if you are neither your residence status will be determined by the sufficient ties test. The latter determines your residence based on a combination of the amount of time spent in the UK and the number of ties you have with the UK.

The latest draft legislation, does not add a great deal to that which we have already seen but has developed further some of the definitions and has added a targeted anti-avoidance rule aimed at preventing previous UK residents with a significant number of UK ties from spending a significant number of days in the UK, without being present at midnight, so that the days would not ordinarily be counted.

From 6 April 2013, the concept of ordinary residence will be abolished and a new overseas workdays relief (OWR) will be introduced. OWR will allow employees who come to work in the UK and become resident here to claim the remittance basis on any income earned through that part of their employment carried out abroad. OWR will apply to non-domiciled individuals who arrive in the UK having been non-resident for the three previous tax years, for the tax year in which they arrive and for the two tax years following. This revised definition is much more certain.

New statutory split year rules will also apply to individuals arriving or leaving the UK part way though the tax year and anti-avoidance rules will be extended to prevent individuals from avoiding income tax on certain types of income during periods of temporary absence from the UK.

Non-domiciled spouse exemption

There is a complete exemption from IHT for transfers between spouses except on transfers (whether during lifetime or on death) from a UK domiciled person to his/her non-domiciled spouse or civil partner. In this case, the exemption has been limited to just £55,000 for many years. The amount of the cap is being increased to £325,000 for transfers from 6 April 2013. This exemption is available in addition to the transferor's available nil rate band (also worth up to £325,000) plus any other exemptions or reliefs.

Alternatively, the full, unlimited spouse exemption can be obtained under a new election regime, whereby the non-domiciled spouse/civil partner of a UK domiciliary can elect to be UK domiciled for IHT purposes. However, this will have the knock-on effect of exposing the worldwide estate of the non-domiciled spouse to IHT and so his non-UK property which would otherwise have been outside the IHT net may become taxable. IHT should, however, be postponed until the second death if each spouse leaves all property to the other, whoever dies first.

An election can be made in writing to HMRC at any time after marriage/civil partnership and will take effect from the date of election. An election will be irrevocable so long as the electing spouse remains UK resident. However, an election will cease to have effect if he or she is non-resident for 3 full consecutive years. If a UK domiciliary dies on/after 6 April 2013, it will be possible for his non-domiciled spouse/civil partner to make a post-death election within 2 years back-dated to the date of death.

Trusts

HMRC had consulted on simplifying the calculation of IHT charges on assets held in certain trusts. However, no legislation will be introduced for now. A further consultation will be published in spring 2013.

The qualifying criteria for the preferential tax treatment afforded to certain types of trusts for disabled beneficiaries is, however, changing from 8 April 2013 to reflect the replacement of Disability Living Allowance by Personal Independence Payments. Changes are also being made to the way trustees of such trusts apply income and capital.

General anti-abuse rule

The GAAR has been amended and is to go ahead from the date when the Bill is enacted rather than from 1 April 2013.

There will be a "double reasonableness test" to determine whether a course of action is abusive but this must now specifically relate to the tax provisions which it is alleged have been abused. One relevant factor will be whether the arrangements involve one or more "contrived or abnormal steps". The legislation includes some example indicators of arrangements which might be considered to be abusive e.g. arrangements that result in income/profits or losses significantly different to what would normally be expected for "economic purposes".

However, the legislation no longer highlights transactions or agreements that include non-commercial terms as one of the indicators of abusiveness and this is a welcome change to the potential application of the rule to IHT planning where commercial considerations are not relevant. In addition, arrangements that accord with and are accepted by HMRC to be "established practice" provide an indication that they might not be abusive.

The procedural requirements for the application of the GAAR have been fleshed out, with more detail on the role of the Advisory Panel which will now be completely independent from HMRC. HMRC has also published its draft guidance on the GAAR. This confirms that an anonymised version of the Advisory Panel's opinion on individual cases will usually be published which will itself become useful guidance on the sort of arrangements that are considered to be caught by the GAAR.

This article first appeared in the Boodle Hatfield Private Client & Tax News December 2012.