The Chancellor announced in his Budget speech of 21 March 2012 two sets of changes which affect purchasers and owners of higher value residential properties in the UK. The first set of changes applied from 21 March 2012 and is contained in the Finance Act 2012. The second set will apply from April 2013 and is the subject of a consultation launched by the Treasury in May 2012.
First set of changes - new purchases on or after 21 March 2012
An increased rate of Stamp Duty Land Tax applies (“SDLT”) where the purchase price of a residential property exceeds £2 million:
a rate of 15% applies if the purchaser is a ‘non natural’ person whether or not UK resident;
otherwise the rate is 7%.
The increased rates of SDLT apply irrespective of the use to which the property is put, so that a higher rate will apply even if a purchaser is proposing to let the property commercially.
A ‘non natural’ person includes a corporate body as well as unit trusts or other collective investment vehicles and partnerships which include companies. Certain property development businesses are excluded from being non natural persons, although a developer (or a company in the same group) must have carried on a property development business for 2 years. The 2 year rule may not be satisfied by a joint venture special purpose vehicle (“SPV”) established specifically for a project unless the SPV is within a group which satisfies the test.
The increased rate of SDLT applicable to a non natural buyer is clearly intended to deter the purchase of higher value residential property in offshore companies and it is probably a rare situation in which such a purchase will now be made by a company unless it is not feasible for the property to be held in the names of the individual owners (e.g. when there are multiple owners or in the context of a property fund). In situations in which the consideration does not exceed £2million so that the 15% rate does not apply to the “non natural” buyer it will be necessary to take into account the possible impact of the second set of changes if the property appreciates in value and the market value in the future does exceed £2million. Partnerships are generally treated as tax transparent so that a partnership structure could be adopted where the partners are individuals without incurring the higher (corporate) rate of SDLT. It would be important the partnership does not include a corporate or other non natural purchaser (as the higher rate is applied to the whole of the consideration and not only to the interests of the corporate partner).
Second set of changes - proposed for April 2013
The consultation document proposes two changes with effect from April 2013, namely, the imposition of:
- an annual charge where residential property with a value in excess of £2 million is owned by a non natural person; and
- a charge to capital gains tax (“CGT”) on a disposal of such residential property for more than £2 million by a non-natural non-UK resident person of such residential property, or of an interest in such a person (e.g. such as shares in a company where 50% or more of the value of the shares reflects the value of a higher valued residential property).
It is possible that both the principles and the detail will change as a result of the consultation process.
An illustrative annual charge is given as £15,000 for a property valued at between £2 million - £5million increasing through three further bands to £140,000 for a property valued in excess of £20 million. The rate of charge (but not the charging bands) is to be increased annually in line with the consumer prices index. It is proposed that a self-assessment filing (and payment of the tax) would be due on 15 April each year (save in respect of the charge for the period beginning 1 April 2013 when special rules will apply) and that a property should be revalued every five years. To enable taxpayers to make the filing in respect of 2013 the value of the property will be taken as of 1 April 2012; a taxpayer is expected to arrange for a valuation of the property, as at 1 April 2012, to be obtained in preparation for 2013. The rules will take into account new purchases after April 2012 of course and the construction of a new dwelling.
The prospective CGT change is potentially of greater immediate significance, although no indication is given of the likely rate of CGT which would be applied and it may not be the ordinary “individual” rate of 28%. A non resident owner of a residential property (or any other UK situate asset) has not previously been liable for CGT (unless the asset has been used in the course of a UK trade) although anti-avoidance rules can attribute gains realised on certain disposals by non-resident owners to UK taxpayers. The new CGT charge has been justified (at least in part) as a means of encouraging the ‘de-enveloping’ of properties and ensuring that non UK resident non-natural owners pay a ‘fair’ share. However, imposing a charge to CGT on a non-resident who is not trading in the UK (and where the existing anti-avoidance rules would not apply) represents a very significant expansion of the scope of the charge to CGT. Bringing into charge pre April 2013 growth in value seems to reflect a desire to increase the tax base (the retrospective aspect being said to be intended to achieve ‘fairness’ as between UK resident and non-UK resident taxpayers) and appears likely to introduce an element of double or triple taxation where the new 15% SDLT charge and/or the new annual charges also apply.
This prospective change will not affect a disposal of (i) residential property by an individual or (ii) residential property worth not more than £2million by a non natural person. It is expected that anti avoidance rules will defeat arrangements which involve two or more connected corporate owners who fragment the ownership so that each ‘interest’ falls below the £2million threshold.
The consultative document indicates expressly that the new CGT charge is intended to apply to the growth in value of the property, irrespective of whether that growth occurred on or after 6 April 2013. Therefore those owners of higher value residential property who have seen a significant increase in the value of their properties since their purchase will potentially face a CGT liability on that growth in value. There will be many properties, particularly in London, now valued at over £2million which were bought many years ago for prices below £2million.
It is likely, therefore, that some owners will wish to consider restructuring the ownership of such property so that gains are realised before 6 April 2013. This may not be simple to achieve, without wider tax and cost implications; for example, where residential property is held in a trust arrangement in which there is or may be UK resident beneficiaries those gains may ultimately be “visited” upon UK beneficiaries in receipt of capital payments in the future.
The consultation document does not indicate how the new rules will work alongside existing anti avoidance legislation (changes to which are to be the subject of a separate consultation exercise as a result of a complaint made earlier this year by the EU Commission) and there may be a number of implications to consider (including, from April 2013 the application of the proposed “general anti-avoidance rule” or GAAR).
The definition of non natural person for the purposes of the CGT charge will be different from that applied to the annual charge. Trustees of a settlement holding property are outside the annual charge but within the CGT charge. The treatment of partnerships will also differ in that a partnership with a corporate partner will be within the annual charge but the CGT will be applied to each partner separately so that only non natural partners (with interests valued at in excess of £2million) will be affected.
It is important to note that CGT applies when there is a disposal. This means not only a sale but many other transactions, including transactions at an undervalue. Thus it is material to consider the market value and whether it is greater than £2million rather than the actual consideration where the transaction involves parties who are connected.
Often properties are owned through offshore companies not because there was an attempt to secure any SDLT saving on a subsequent sale of the property (by selling the shares in the company) but because the use of the company provided a “buffer” against a potential Inheritance Tax (“IHT”) liability on the death of the owner and/or to maintain the owner’s privacy. Many owners of residential property, therefore, acquired property through an overseas company (with or without a trust structure) many years ago and have, until now, continued to hold the property in those structures without change. However, with an IHT rate of 40% (which applies where the assets of the deceased exceed £325,000, leaving aside any reliefs or exemptions) the IHT issue will often be of greater concern and any steps taken to ‘de-envelope’ a property will give rise to the need to consider the IHT position. Any ‘de-enveloping’ might itself give rise to taxation implications, including SDLT, particularly if there is debt within the structure.
There will be no ‘one size fits all’ solution and each property ownership structure will need to be considered in the context of the particular facts and family circumstances. By way of example, the following considerations may arise:
- While the cost of the annual charge might be an ‘acceptable’ level of tax to pay (although the cumulative cost over time will be significant), the CGT implications are more far reaching. As pointed out above, long term historic gains will potentially be within the charge to CGT. Even in situations in which the annual charge or new CGT rules would not apply immediately as the value of the property is below the £2 million threshold, this may not continue to be the case in the future when (as is proposed) a 5 yearly revaluation is made or a disposal occurs.
- As the consultative document does not address the rate of CGT which will apply, the rate of CGT may not be known until March 2013. An owner’s view may depend upon the likely rate of tax, and this may leave very little time to achieve a restructuring before the new rules come into effect on 6 April 2013.
- It is not clear that the prospective CGT liability on the sale of shares in an overseas property holding company will apply in all cases. The consultation document recognises that there are provisions of Double Tax Treaties to consider. While most (if not all) double tax treaties entered into by the UK reserve taxing rights on immoveable property to the country in which the property is situate, the articles relating to the taxation of capital gains do not in all cases extend the reservation of taxing rights to a disposal of the shares in a property owning company.
- Restructuring a holding structure may not be a simple matter because of (i) IHT implications or (ii) there being UK resident ‘beneficiaries’ involved. In some cases there may be an acceptance of the liability to the new taxes as a more cost effective option to sidestep any adverse implications of trying to change the structure.
- Meeting the proposed annual charge may give rise to prospective remittance issues for a family member in occupation of the property who is UK resident but not UK domiciled.
- There is limited scope for a widely owned “fund” to avoid the annual charge and/or the CGT liability even if the fund has bought higher value residential property and paid SDLT at the now higher rate of 15%. This is a clear situation of double/triple taxation.
Regrettably these changes are a further example of the uncertainty which now surrounds the UK tax system, and it is becoming increasingly difficult for clients to make considered decisions when changes are made which have, to a degree, retrospective effect.
This note is not an exhaustive commentary on the changes. The changes apply to residential property being a “dwelling” including land used and enjoyed with a dwelling. In more complex scenarios and the purchase/sale of multiple properties the question of whether there is a single dwelling valued at in excess of £2million would need to be considered.
The note also does not address the question of what is a development for the purposes of determining whether a purchaser is a “developer”.