One of the hottest topics since they were announced last March have been the proposed changes affecting high-value residential properties, in particular in relation to what have been typical holding structures for UK residential property for non-UK resident and/ or domiciled individuals. Since that announcement we have seen both a consultation (and responses to that consultation) and draft legislation on the proposed changes so, although we are awaiting the publication of further draft legislation and responses to a further consultation, we wanted to provide a concise summary of where we are today, given that (other than the stamp duty land tax (SDLT) changes which came into effect from 21 March last year) most of the proposed changes are due to come into effect on 1 April this year.
Annual residential property tax (ARPT)
The most immediate tax (and indeed, reporting) consideration for these structures will be the ARPT, which will be triggered if a company, a partnership which has a company as one of its partners, or a collective investment scheme (each a ‘non-natural person’) holds an interest on 1 April this year in a UK residential property which is valued at £2 million or more (a HVRP). Whether the dwelling is within the tax, and what rate the tax will be, depends on the band (see below) its value fell within at 1 April 2012 if it was owned on that date by the non-natural person, or its value on acquisition or completion of construction or conversion if afterwards. The bands are:
Click here to view table.
Crucially, and departing from the Government’s previous proposal, a series of reliefs in relation to the ARPT has now been confirmed in the draft legislation intended to exclude ‘genuine businesses carrying out genuine commercial activity’ from the scope of this and other charges. Therefore, subject to the satisfaction of certain conditions, property development, rental and trading businesses will be excluded from the ARPT regime as well as dwellings held to provide employee accommodation, dwellings owned by charities and held for charitable purposes, properties which are run as a business (such as historic houses which are open to the public) and farmhouses.
Stamp duty land tax
From 21 March 2012, any purchase of a HVRP by 'non-natural persons' carries a SDLT charge of 15%, as opposed to the highest level otherwise payable of 7%.
The non-natural persons and HVRPs that fall outside the ARPT regime will also fall outside the scope of the 15% SDLT charge (although acquisitions of HVRPs by non-natural persons will still be subject to a 7% SDLT rate). However, these reliefs will only be introduced from the date of Royal Assent of the Finance Bill. Therefore, non-natural persons who may be able to claim any of the reliefs may wish to consider postponing transactions until after the Finance Bill comes into effect.
Capital gains tax (CGT)
The Government has yet to publish draft legislation on the proposed changes to the CGT regime (although it is expected by the end of January). However, the Government’s responses to the consultation launched last year give a strong indication of how the CGT regime will be extended going forward and are, in the main, very positive:
- the same reliefs as apply in relation to the ARPT and SDLT should apply in relation to the proposed extension of the CGT regime.Therefore, very importantly, this means that non-resident trustees holding HVRP directly (and not through a holding company, unless any of the reliefs apply to that company) will not be caught within the CGT regime (as was previously proposed). The UK tax treatment of such structures should remain unchanged going forward (as ARPT will also not apply); and
- HVRPs will effectively achieve a rebasing as CGT should only apply to that part of the gain which accrues on or after 6 April 2013. Therefore, even if a structure falls within the scope of the extended CGT regime, the tax charge on a sale may in fact be minimal.
The Government has proposed that the tax charge that will apply will be at a 28% rate but, in light of this, has decided to launch a further consultation as to whether UK resident non-natural persons should also fall within the CGT (as opposed to the lower UK corporation tax) regime.
It is vital that existing structures are reviewed as soon as possible to assess the implications of the new tax charges for such structures. There will not be a one size fits all approach as, depending on the particular circumstances of the beneficial owners of such structures and the rationale for implementing these structures in the first instance, the additional tax and reporting obligations may well be a burden that those owners are willing to accept.