In our June 2012 briefing we reported on the Chancellor's three-pronged assault on high value UK residential properties that are 'enveloped' in a company or other non natural person (which for certain purposes can include trusts). A consultation took place over the summer with the promise of draft legislation 'in the autumn'. The Chancellor will deliver his Autumn Statement on 5 December 2012 and the draft legislation for next year's Finance Bill is due to be published on 11 December 2012.
Once the details are available careful consideration will need to be given to current property owning structures to determine what (if anything) should or can be done prior to the new rules coming into force. In the meantime, this alerter first provides a brief reminder of the proposals, and then looks at the question 'What should I be doing now?'.
The changes - a brief reminder
SDLT: With effect from 21 March 2012 a new 15% rate of stamp duty land tax (SDLT) applies on purchases of UK residential properties worth over £2 million by non natural persons.
Annual charge: From 1 April 2013 an annual charge will apply to UK residential properties valued at over £2m owned by non natural persons. The levels of the annual charge will be set at £15,000 per annum for properties valued at between £2m-£5m; £35,000 for properties valued at between £5m-£10m; £70,000 for properties valued at between £10m‑£20m; rising to £140,000 for properties worth more than £20 million.
One important point to note about the annual charge is that it will be payable by UK resident and non-UK resident non natural persons alike. There are to be certain exemptions for property developers, similar to those available for the 15% SDLT rate. However, high value residential property acquired for investment purposes will, as the proposals currently stand, also be subject to the annual charge.
Capital gains tax: Non natural persons who are resident in the UK are already subject to tax on gains realised on the sale of residential property, by way of either capital gains tax (CGT) or corporation tax on capital gains. From 6 April 2013, the CGT regime will be extended to gains on the disposal of UK residential property, and shares or interests in such property, owned by non natural persons who are non-UK resident for tax purposes.
It is envisaged that the extended CGT charge will only apply to disposals of residential property where the amount of the consideration for the disposal exceeds £2m. There is currently to be no protection for latent gains that have accrued but not been realised before this extension of the CGT regime.
The aim is to discourage enveloping of property and all three provisions will, where relevant, run in tandem.
In our representations on the Consultation Document we made a suggestion that the Government should at the very least delay introduction of the CGT changes to allow for 'de-enveloping', ie taking assets out of corporate/trust structures and into personal ownership, to take place in a sensible, timely fashion. Whether that transpires remains to be seen, but in the meantime if owners do not want to be exposed to the annual charge going forward and wish to protect (at least) gains which have arisen to date they must start to prepare to take action.
We may get an indication in the Autumn Statement as to the Chancellor's reaction to responses made on the Consultation Document and whether the overall shape of the proposals has changed. However it is likely to be necessary to see the draft legislation to gain the full picture. Even then there will be a consultation period on the draft legislation which is due to end on 6 February 2013.
What are the available options?
Those with property held through a structure where there is a prospect of it being subject to the annual charge and/or the extended CGT regime may wish to take steps to remove the property from the structure to avoid these charges in the future and the administrative burden which the annual charge will entail. Alternatively some may take the view, having weighed up all the relevant factors, that they would prefer to keep the structure in place. If there are to be no rebasing provisions in the new CGT regime then some may wish to investigate options for rebasing the property within the structure prior to April 2013 to take at least gains accrued to date out of the CGT net.
In deciding what to do now, it is therefore necessary to compare not only the costs, but also less tangible benefits of preserving, altering or entirely dismantling a structure.
What should I be doing now?
It is too early to start taking action, to rebase or to de-envelope a property, but it is important now to start pulling together the information needed in order to make a decision once more concrete information is available in early December. The best course for each property-holding structure will need to be considered on its own individual facts, there is no 'one size fits all' solution for any particular structure.
The key to reaching the right decision will be to review the original reasons for creating the structure and consider whether they are still valid. Have the requirements in fact changed in the interim? If so, what are the current requirements? Generally the reasons for using a structure of this sort would include a mix of:
- inheritance tax protection;
- avoiding the need for UK probate; and
- reasons relating to another jurisdiction with which the individual or family was connected.
Are they still valid? Do they outweigh the professional fees which will be incurred in altering the structure and the costs of refinancing if there is outstanding borrowing on the property?
Once the reasons have been reviewed it will be possible to make a considered decision. De-enveloping may be the best solution for many. To get the best result however, it will be important to identify the tax and other costs of the process of de-enveloping (including the costs of refinancing if there is an outstanding borrowing) and then to compare them with the tangible and intangible costs and benefits of either maintaining or altering the structure.
There are likely to be many people seeking to de-envelope or alter their structures. The available window of time is only small. As a result, the professionals in the offshore jurisdictions who deal with liquidations and the banks involved in refinancing, will be exceptionally busy: the sooner a start is made, the better.
There will inevitably be a significant level of immediate commentary once the final form of the proposals is available. In accordance with our usual approach to substantial changes in the law such as this we will be working carefully, but swiftly, to sift through the detail and analyse the implications before commenting.