The high-value residential property market in the UK is slowly coming to terms with the raft of new taxes that were announced in 2012. At last, we now have the final piece of the puzzle. That means those affected can finally start making decisions about what to do with their existing corporate property structures. However, until the draft legislation actually becomes law, we may yet see further changes.
The Government has now released details of the new capital gains tax (CGT) charge which affects high value UK residential property. The new charge will take effect from 6 April 2013. It potentially applies to all corporate structures owning a UK residential property worth more than £2 million on 1 April 2012.
The effect of the new law is that from 6 April 2013, whenever a UK residential property owned by a "non-natural person" is sold for more than £2 million or is otherwise disposed of, a CGT charge will apply on the gain at the rate of 28%. Fortunately, only the increase in value from 6 April 2013 will be taxable. A non-natural person includes any company, whether based in the UK or offshore. It does not include trusts.
The CGT charge will only apply if the company was also liable for the new annual residential property tax (ARPT). That means a company owning a residential property worth less than £2 million on 1 April 2012 will avoid the CGT charge, at least until 2018, even if the property is sold for more than £2 million. Similarly, a company that benefits from ARPT relief because it is a property development or investment company will also avoid the CGT charge. If ARPT relief was available for just some of the company's period of ownership then the CGT charge will be pro-rated.
A reduction in the CGT charge may be available where the property is sold for just over £2 million and a large gain arises. Without this relief, the company might otherwise be tempted to sell the property for just under £2 million simply to avoid the CGT, and yet still be in a better financial position.
It was something of a surprise that the new 28% CGT charge will now also apply to UK-resident companies. Such companies have previously been liable for corporation tax, which is charged at a lower rate than CGT. However, as most property-owning companies based in the UK operate as rental or development businesses, they are likely to benefit from ARPT relief. They would therefore avoid the 28% CGT charge but still be liable for UK corporation tax in the usual way.
The new CGT charge will not apply to sales of shares in companies owning UK residential property. The charge only applies when the company sells the property itself.
What should affected corporate property owners do now?
- It is very important to obtain two reliable, and ideally professional, valuations of the property as soon as possible. The first valuation must be at 1 April 2012 and the second (if necessary) at 5 April 2013. If the April 2012 valuation is under £2 million then the ARPT will not apply. In that case the company will also avoid the new CGT rules and no valuation for 6 April 2013 will be necessary.
- The property will need to be valued again on 1 April 2017. If it is then valued at over £2 million, the ARPT will start to apply from 6 April 2018, as will a CGT charge on a sale after that date.
- The new CGT charge does not apply to personally-owned properties or those owned by trusts. It may therefore be sensible to move properties out of corporate structures and into personal ownership or direct trust ownership. CGT can then be avoided altogether if the individual or trustees are eligible for main residence relief or are not UK-resident for tax purposes.
- The new CGT charge will not apply to property investment or development companies. Although the property may currently be occupied by family members, if it is likely to be rented out long-term in the future then the CGT charge on an eventual sale may be minimal.
- Even if the new CGT charge will not apply to a particular structure, or the post-2013 gain is expected to be minimal, the existing anti-avoidance rules need to be considered. They are unaffected by the new CGT rules but in many cases their impact on existing structures is only now being fully appreciated. Although the new CGT rules may not themselves justify reorganising or dismantling the current structure, the existing anti-avoidance rules could well do so.
- A decision to dismantle an existing corporate structure on CGT grounds alone may not be sensible. Every situation is different and many other factors will be important including exposure to inheritance tax, privacy, asset protection and the likelihood and timing of a future sale.
- Even if the decision is made to dismantle an existing structure, the full tax consequences of the dismantling need to be considered very carefully. In many cases unexpected taxes can arise as part of the liquidation process itself, including stamp duty land tax and CGT. By careful planning at an early stage, it may be possible to avoid these.