The 2012 Budget signalled the Government’s intention to target perceived tax avoidance arrangements involving high value residential property. In particular, the measures proposed by the Government sought to discourage the holding of residential property through corporate vehicles in order to save SDLT.
The Budget announced a three-pronged approach in this respect:
- First, and with immediate effect from March 2012, it introduced a new 15 per cent rate of SDLT on the acquisition of UK real estate by certain “non-natural persons” such as corporate bodies.
- Secondly, it announced a consultation on introducing an annual tax charge on residential properties worth more than £2m owned by such non-natural persons.
- Thirdly, it notified its intention to extend the scope of capital gains tax, from 6 April 2013, to cover gains arising on the disposal of UK residential property by non-UK resident non-natural persons.
This article provides a brief update on these three anti-avoidance measures, following draft legislation published in December.
The 15 per cent SDLT Rate
The 2012 Budget clearly demonstrated the Government’s focus on the SDLT treatment of high value residential real estate transactions. In addition to a new 7 per cent rate of SDLT for residential property purchases of more than £2m, March 2012 also saw the introduction of a significantly higher 15 per cent rate in respect of acquisitions for more than £2m by “non-natural persons”, such as companies.
Although the 15 per cent rate was designed to discourage individuals from avoiding SDLT by holding property through corporate holding structures, the provisions were unintentionally broad. As a consequence, certain persons (such as genuine commercial landlords, property developers and real estate investment funds) who were not the target of the new measure, were in any case caught by it.
Following ongoing consultation, the Government has accepted that the provisions were too widely drafted and, with effect from Royal Assent of Finance Bill 2013, a number of new reliefs from the 15 per cent rate will apply. In particular, there will be a relief for property rental businesses, and the relief for property development businesses will no longer be subject to a condition that they have been carrying on the business for at least two years. However, the reliefs will only apply if the qualifying conditions are satisfied throughout the following three years.
These reliefs should protect those who purchase property through corporate structures for genuine commercial reasons. However, it should be noted that Royal Assent is unlikely to take place until July 2013 and, until such time, non-natural purchasers should beware the 15 per cent rate.
Annual Residential Property Tax
With effect from April 2013, certain non-natural persons owning residential property worth over £2m will be subject to a new annual tax charge called the Annual Residential Property Tax (“ARPT”).
The amount of ARPT payable will depend upon the valuation of the property on the relevant valuation date. The first valuation date is 1 April 2012 or the date of acquisition of the property if later. There will be further valuation dates on 1 April 2017 and every five years afterwards. The charges are set out in the following table.
Click here to view table.
ARPT will be self-assessed and the first self-assessed tax return (for the year 2013-14) must be submitted by 31 October 2013. Subsequent returns will be due on 30 April each year.
The draft legislation published in December includes a number of reliefs designed to remove from ARPT non-natural persons holding high value residential properties for genuine business purposes. As with the incoming reliefs from the 15 per cent SDLT rate discussed above, this should ensure that property rental businesses, property developers and real estate investment funds fall outside the scope of the tax and that ARPT is solely focused on owner occupiers intent on holding their residential property in ownership wrappers. However, it remains to be seen how the legislation will be applied in practice.
The draft legislation remains open to consultation until 6 February 2013, so further amendments to the provisions may yet be made.
Extending Capital Gains Tax
The final measure proposed in the 2012 Budget was the extension of capital gains tax to cover capital gains arising on disposals of UK residential property by non-UK resident non-natural persons.
The further detail published in December provided helpful clarification on the scope of the proposed extension. Most importantly, it was clarified that the charge will only apply to gains accruing after April 2013 and not to gains which had already accrued prior to that date.
The Government’s current intention is to implement the capital gains tax changes with effect from 6 April 2013. However, draft legislation has not yet been released. It is to be hoped that the very tight timetable will allow for further consultation prior to implementation of the legislation.
In general, the reliefs announced in December should ensure that the above measures do not materially impact upon companies and other non-natural persons holding UK residential properties for genuine commercial reasons. However it will be important for those owners to ensure that relevant reliefs are not lost by allowing relatives or connected persons to occupy the property.
Individuals who currently hold property through a corporate wrapper or other non-natural person should consider the potential implications of the measures. In particular, such individuals will need to weigh up the benefit of unwinding their existing holding structures to avoid the increased cost and administration arising from these anti-avoidance provisions against retaining the advantages of existing structures (which may include inheritance tax benefits or confidentiality).
Individuals looking to acquire high-value residential real estate in the UK must also now take these rules into account when determining the most beneficial method of acquisition.