On the last day of May 2012, the Government launched a consultation on two controversial measures announced in this year's Budget. The first measure was the so-called 'mansion tax’ (or 'annual charge' as the consultation calls it) for residential properties valued at over £2 million owned by certain 'non-natural’ persons, including companies. The second was the extension of capital gains tax (CGT) to disposals by non-resident, non-natural persons for more than £2 million.

The consultation period ends on 23 August 2012 with a view to draft legislation being published in the Autumn and included in next year's Finance Bill. Until then, we have to rely on the consultation for the Government’s thinking on tackling tax avoidance, including the wrapping of expensive properties in corporate and other envelopes!

The annual charge

The annual charge is a new tax which aims 'to encourage those who own UK residential properties valued at over £2 million in envelopes to take them out of those envelopes’. The consultation explains that enveloping occurs when a property is acquired using a non-natural person. If you set up a company to purchase a property as the sole asset of that company, it is possible to sell that property by simply selling the company, so that the buyer does not pay stamp duty land tax (SDLT) and then there is potential for SDLT avoidance on subsequent changes of ownership.

The aim of the annual charge is to encourage individuals to take high value properties out of the envelope. Although the annual charge is not due to take effect until 1 April 2013, the relevant valuation date for calculating the annual charge during the first five years of the scheme is:

  • 1 April 2012 for property owned on that date; and
  • the date of acquisition for property acquired after 1 April 2012.

Properties that remain enveloped will be re-valued every five years. A further valuation will, therefore, be required on 1 April 2018 (the relevant valuation date being 1 April 2017). Clearly, the idea is to encourage the de-enveloping of property while imposing a significant charge on those who choose not to.

The annual charge will be levied on an increasing scale. For the year beginning 1 April 2013, it will be £15,000 for properties valued between £2 million and £5 million; £35,000 for £5 million to £10 million; £70,000 for £10 million to £20 million and £140,000 for properties valued in excess of £20 million. The annual charge for subsequent years will be index-linked and increased annually in line with CPI. A bona fide property development business is excluded from these charges providing it meets certain conditions. The return and payment in full must be made within 15 days after the start of each account period ie by 15 April in each year.

In case you are wondering how the Valuation Office (on behalf of HMRC) is going to be able to physically value hundreds of high value properties, the consultation reveals that the obligation to carry out the valuation is on the taxpayer. This is a further extension of 'self-assessment’.

Our advice is that unless you are absolutely certain about the value of your property, you should instruct a local surveyor to provide a written valuation. The consultation states that HMRC guidance will confirm that:

'a valuation provided to a taxpayer by a suitably qualified valuer of real estate would normally protect the taxpayer from possible penalties should it be subsequently established that their property has been significantly undervalued. A self-valuation would bear a higher risk of not providing such protection'.

It will be particularly important to get the protection of a professional valuation for properties that are on the edge of a charging band as HMRC is likely to target such properties as part of its compliance activities. For properties that were acquired for less than £2 million, confirmation should be sought that the current value is not approaching £2 million. If it is, a professional valuation may be required. The consultation states that penalties may be levied if a property owner fails to take proper care to establish a correct valuation and it turns out the property was in fact worth more than £2 million. Valuations will also need to be reviewed on 1 April 2017 if the property is still owned at that time.

Capital gains tax

With effect from 6 April 2013, CGT will be extended to certain non-natural persons not resident in the UK for tax purposes, where the sale consideration exceeds £2 million. It will also apply to the grant of an option over property. CGT will apply to the total gain during the ownership of the property, not just the gain after implementation in April 2013. The rate of tax (which is not the subject of the consultation) will be confirmed in next year’s Budget, although we have heard 24% being mentioned.


The Government has provided a window of opportunity until 1 April 2013 to de-envelope to avoid the annual charge and (for non-resident companies only) for future liability to CGT disposal. If you are currently holding a high value property asset in the name of a non-natural person then clearly you need to consider your options.

The message is certainly not to panic. It is our view that nothing should be done before the Finance Bill is published in the Autumn as we need to see the detail of the Bill once the consultation process has concluded.

This is a very brief summary of the consultation. The full consultation paper can be downloaded from the HM Treasury website.