Surprise measures to increase the scope of certain taxes on higher value residential property acquired by and/or held through corporate envelopes were announced by the Chancellor in the UK Budget on 19 March 2014. The draft Finance Bill 2014 has since been published and provides some clarification of these proposed changes. In addition, at the end of March, the UK Treasury published its promised consultation on the introduction of a capital gains tax (CGT) charge on non-residents who dispose of UK residential property. This is to take effect from 1 April 2015.
Summary of Budget measures
- An extension of higher rate Stamp Duty Land Tax (SDLT) at 15% to apply to acquisitions of residential properties worth more than £500,000 by 'non-natural persons' (NNPs), broadly, companies, partnerships with at least one corporate partner and collective investment schemes;
- An extension of the annual tax on enveloped dwellings or ATED (a tax introduced in April 2013, to sit alongside higher rate SDLT and the ATED-related CGT charge, for UK residential properties owned by NNPs and worth over £2 million) to apply:
- with effect from 1 April 2015, to properties worth between £1,000,001 and £2 million (valued as at 1 April 2012 or the date of acquisition, if later) at the rate of £7,000 for the chargeable period from 1 April 2015 to 31 March 2016;
- with effect from 1 April 2016, to properties worth between £500,001 and £1 million (valued as at 1 April 2012 or the date of acquisition, if later) at the rate of £3,500 for the chargeable period from 1 April 2016 to 31 March 2017.
- An extension of the ATED-related CGT charge at 28% to apply to:
- properties worth between £1,000,001 and £2 million on gains accruing on or after 6 April 2015; and
- properties worth between £500,001 and £1 million on gains accruing on or after 6 April 2016.
- In addition, the rates of ATED for properties worth over £2 million have increased in line with the Consumer Prices Index (CPI), as expected. These bands and the applicable rates for the chargeable period from 1 April 2014 to 31 March 2015 are, as follows:
- property valued over £2 million and up to £5 million - £15,400;
- property valued over £5 million and up to £10 million - £35,900;
- property valued over £10 million and up to £20 million - £71,850; and
- property valued in excess of £20 million - £143,750.
Summary of consultation proposals
At the UK Autumn Statement in December 2013, the Chancellor announced that, with effect from 6 April 2015, non-UK residents will be liable to CGT on gains made on disposals of UK residential property. The consultation provides an outline of the proposed details of this new charge, but there are still many unanswered questions upon which the UK Government are seeking views. Accordingly, the tax may look very different from the existing proposals by the time it is introduced. Briefly, the proposals are as follows:
- The new CGT charge on non-residents will focus on "property used or suitable for use as a dwelling" and, unlike the ATED-related CGT charge, it will include residential property used for letting purposes.
- There will be exclusions for certain types of property in communal use, e.g. boarding schools and nursing homes.
- The charge will apply to individuals, partnerships, trustees and non-resident companies (to the extent they are not caught by the ATED-related CGT charge). Funds which are not closely-held will not be caught and neither will pension funds, real estate investment trusts (REITs) or their foreign equivalents.
- Principal private residence relief (PPR) will be available in appropriate circumstances. However, changes are proposed to remove the ability to elect one's main residence, in order to prevent non-residents always electing their UK property as their main residence. These changes will also affect UK residents.
- Under the new CGT charge, the rates for individuals will be either 18% or 28% according to their status as basic or higher/additional rate taxpayers.
- There will be a mechanism for declaring losses and offsetting them against gains from the sale of UK property, where appropriate.
- There is a proposal to introduce a withholding tax regime, similar to that for SDLT, ideally to sit alongside a self-assessment option.
The consultation closes on 20 June 2014 and we will be submitting our views. As the proposals develop and draft legislation is published, we will report further.
The expansion of the existing tax regime for UK residential property held by NNPs was unexpected. For new acquisitions of UK property where there is no available relief, the increased SDLT cost is likely to be a significant deterrent to such structures for properties worth £2 million or less. On the other hand, the expansion of ATED may in some cases simply be regarded as an additional cost of maintaining such a holding structure, albeit an unwelcome one.
Although the extended ATED-related CGT charge will be an issue for many, the introduction of a new CGT charge for non-residents disposing of UK residential property with effect from 6 April 2015 is much further reaching and, subject to the application of a relief where available, will catch gains on disposals of UK residential property of any value by individuals and most other entities.
Nevertheless, there may continue to be situations in which, on balance, there are advantages to holding UK residential property through a corporate envelope rather than by an individual or trustees directly. However, careful consideration of all the relevant circumstances will be required to determine whether this may be the case.
Accordingly, any non-UK resident who owns or is considering acquiring UK residential property through a holding structure or otherwise, may wish to review the position as the details of the proposed new CGT charge for non-residents become clearer, in order to determine what may be the best way to hold such property for the future.