The publication on 11 December 2012 of the draft Finance Bill 2013 (FB 2013) and the summary of stakeholder and Government responses (Summary of Responses) to the HM Treasury consultation of May 2012 (the Consultation) revealed the true extent of the Government’s attack on the purchase and ownership of high value UK residential property by “non-natural persons”.
The good news is that the initial proposals in the Consultation have been watered down, especially for genuine property developers and investors in UK residential property. The bad news is that the Government is pressing ahead with the introduction of the Annual Residential Property Tax (the ARPT) and the extension of Capital Gains Tax (CGT) both of which will be effective from April 2013.
Urgent action is required by existing owners of UK residential property affected by these changes to ensure that advice is taken and, if necessary, there is sufficient time to restructure before April 2013.
This note identifies the key points from the draft legislation and the Summary of Responses, provides comment and finally highlights action points in light of the FB 2013.
The draft FB 2013 proposes that the ARPT will apply to the ownership of interests in UK residential property by nonnatural persons if the interest is valued at over £2 million.
When will the ARPT apply?
The ARPT will apply from 1 April 2013 for the period 1 April 2013 to 31 March 2014 and then annually from 1 April in subsequent years.
Who will the ARPT apply to?
The ARPT will apply to “non-natural persons”, broadly defined as companies, partnerships where at least one member is a company and certain collective investment vehicles.
What will the ARPT apply to?
- The ARPT will only apply to interests in UK residential property (including properties being constructed or adapted for residential use).
- For mixed use property (i.e. part residential and part nonresidential property) only the value of the residential part will be subject to the ARPT.
- Where more than one interest is held in the same property (e.g. block of flats) the ARPT will apply to the total value of the separate interests.
When must property interests be valued?
- The first valuation date is 1 April 2012 and then on every 5 year anniversary subsequently for any interest in UK residential property held on or before 1 April 2012.
- In other cases the first valuation date will generally be the day of completion (for purchases), the day of disposal (for part disposals) or the day the property becomes UK residential property.
- Where any property interest is valued within 10% of one of the thresholds (£2 million, £5 million, £10 million and £20 million) the Government intends to introduce from June 2013 a free-of-charge pre-return valuation checking service.
How much is the ARPT?
The ARPT from 1 April 2013 will depend on the value of the interest in UK residential property as follows:
- Value greater than £2 million but not greater than £5 million – annual tax of £15,000;
- Value greater than £5 million but not greater than £10 million – annual tax of £35,000;
- Value greater than £10 million but not greater than £20 million – annual tax of £70,000;
- Value greater than £20 million – annual tax of £140,000.
- The ARPT will be pro-rated where ownership of the interest is only for part of the relevant year or if a relief applies for part of the relevant year.
- The ARPT will increase annually in line with the Consumer Prices Index.
Reliefs from the ARPT
A number of absolute reliefs from the ARPT have been introduced in the draft FB 2013 to include:
- Genuine property letting: where a property rental business has let the property interest (or intends to let the property interest “as soon as is reasonably practicable”);
- Genuine property development: where a property developer exclusively holds the property interest for the purpose of redeveloping and reselling the land and/or redeveloping the land to let the property interest as a property rental business “without delay”;
- Genuine property trading: where a property trading business which includes the buying and selling of UK residential properties holds the property interest for the sole purpose of resale in the course of that business;
- Property held to provide accommodation for employees and partners: where a trade is carried on and the property interest is made available as accommodation to an employee or partner of a partnership (neither of whom owns a 5% or greater interest in the trade) solely or mainly for the purposes of such a trade;
- Properties run as businesses open to the general public: where a trade which receives income (or intends to receive income “as soon as is reasonably practicable”) permits persons to occupy at least a “significant part” of the interior of the property interest and such an interest is available for the use or enjoyment of the general public for at least 28 days during the relevant year.
The reliefs are generally subject to the property not being occupied by a “non-qualifying individual” (broadly a connected person) and the business or trade being on a commercial basis with a view to realising profits.
Returns and payment of the ARPT
- A specific ARPT self-assessment return must be filed with HMRC annually (even where relief is being claimed) in the first year on or before 1 October 2013 and in other years on 30 April. In other cases the return must be filed within either 30 days of completion (new purchases) or 90 days of the ARPT applying (e.g. newly constructed or change of use properties).
- The ARPT must be paid by the same dates as the filing of the ARPT return except that in the first year payment must be made on or before 30 October 2013.
Extension of CGT
We must wait until “early 2013” for draft legislation in relation to the extension of CGT. However, the Summary of Responses explains the Government’s current thinking.
The extension of CGT will apply to the disposal of interests in UK residential property by non-natural persons for more than £2 million.
When will CGT apply?
The extension of CGT will apply from 6 April 2013 but only on gains which accrue on or after 6 April 2013.
Who will CGT apply to?
The extension of CGT will apply to the same non-natural persons as those subject to the ARPT so broadly companies, partnerships where at least one member is a company and certain collective investment vehicles.
What will the ARPT apply to?
The extension of CGT will apply to the same UK residential property subject to the ARPT so only to interests in UK residential property.
What is the rate of CGT?
The initial rate of CGT for these purposes will be 28%.
Reliefs from CGT
The reliefs applying to the ARPT will also apply to the extension of CGT. In addition, a tapering relief will apply for gains where the property is worth just over £2 million.
Loss relief will only be allowable down to the £2 million threshold and such losses may only be deducted for CGT purposes against other gains on high value UK residential property.
For “consistency” the Government is considering an extension of the CGT regime to the disposal of high value UK residential property by both UK and non-resident non-natural persons. In the Consultation it was proposed that only non-resident nonnatural persons would be affected.
Reforms to Stamp Duty Land Tax (SDLT)
From 21 March 2012 a 15% rate of SDLT has applied to the purchase of interests in UK residential property by non-natural persons if the interest is valued at over £2 million.
The draft FB 2013 proposes the following reforms to the 15% rate of SDLT (to apply from Royal Assent of the FB 2013):
- Replacing the current two year trading condition for property developers with the reliefs applying to the ARPT so that where any relief applies SDLT will be payable at only 7%.
- The introduction of a “clawback” provision so that if relief is claimed and within three years of the purchase the property no longer qualifies for relief additional SDLT will be payable as if the relief never applied.
Let’s start with the good news. After the imposition of the 15% rate of SDLT in the Budget 2012 and the far reaching proposals in the Consultation relating to the ARPT and the extension of CGT, the draft FB 2013 and the Summary of Responses should, overall, be welcomed. The introduction of the new reliefs to all three taxes (albeit for the 15% rate of SDLT only from Royal Assent next year) shows that the Government has ostensibly listened to and acted on many of the responses to the Consultation. The new reliefs are not perfect, but they are a huge improvement on the much criticised two year property developer rule. The majority of genuine businesses purchasing, holding and disposing of high value UK residential property should qualify for relief.
Applying the extension of CGT only to gains which accrue on or after 6 April 2013 is also positive news. It ensures an automatic rebasing for existing owners of high value UK residential property who fall within the extension of CGT and prevents possible CGT on retrospective gains.
The other noteworthy piece of good news is that the Government has decided that the same definition of non-natural person should apply to all three taxes. In the Consultation the scope of entities subject to the extension of CGT was extremely broad and included trustees, personal representatives and other foreign entities. It now seems that trustees and foreign entities who are not non-natural persons will be able to purchase, hold and dispose of high value UK residential property without being affected by these additional tax charges.
It is now absolutely clear that the real target of this three pronged attack are individuals who indirectly purchase and own high value UK residential property for their own occupation and enjoyment.
Perhaps the biggest question therefore is why the Government has decided to introduce broad rules with reliefs rather than narrower and defined rules with no or limited reliefs. Surely this would have achieved the Government’s desired outcome without affecting genuine businesses involved with UK residential property who must now examine the new rules and, where necessary, claim relief (at least annually) to avoid additional tax.
The announcement that the Government is considering an extension of the CGT regime to the disposal of high value UK residential property by UK as well as non-resident non-natural persons has taken almost everyone by surprise. The Government’s current view is that in practice only a “very small number” of UK non-natural persons would be subject to such CGT on the basis that the reliefs will protect genuine commercial businesses. The big concern is that if for any reason a relief does not apply then at the point of disposal the UK nonnatural person will be faced with a higher rate of tax on any gain (28% rather than the applicable rate of corporation tax). The Government is consulting on this new issue and will make a decision when the CGT legislation is published in the New Year.
- Urgently and well in advance of April 2013 it is essential for any existing structure holding high value UK residential property through a non-natural person to carry out a careful review and analysis of the impact of the FB 2013.
- Any new purchase of high value UK residential property must now be structured with care.
Revisiting and re-examining the original reasons for creating the structure should be the starting point.
Considering whether any of the new reliefs apply to the existing structure and whether any such reliefs will be available until the disposal of the property should be the next priority. If so, the ARPT and the extension of CGT will be avoided from April 2013 so the existing structure can remain intact (unless there are any other good reasons to restructure).
If the reliefs do not afford protection from the ARPT and the extension of CGT a careful review and analysis should consider the tax (UK and foreign) and non-tax consequences of a restructure compared to the implications of maintaining the existing structure. This will be highly fact dependent, but these are some key points:
- For trustees or individuals owning shares in a company, a liquidation of the company may trigger a CGT and/or a SDLT charge (depending on the circumstances).
- Even if a tax charge to restructure is acceptable, direct ownership or any new structure may expose the individual to Inheritance Tax (IHT) and, if the property is let in the future, a higher rate of income tax.
- Where a sale of the property is anticipated soon, the future capital gain is expected to be small and/or IHT protection is paramount, the disadvantages of direct ownership or any new structure may outweigh the benefit of avoiding the ARPT and the extension of CGT.
- Where it is possible to restructure without any adverse UK tax consequences implementation will be required before April 2013 to avoid the ARPT and the extension of CGT from applying.
New purchases and restructures
A range of options exist for any new purchase or restructure of high value UK residential property such as:
- Direct ownership, which offers simplicity. The exposure to IHT of owning UK property can be mitigated with life assurance and/ or borrowings. The ARPT and the extension of CGT will be avoided and, if main residence relief from CGT applies, no CGT will apply at the point of sale.
- A nominee arrangement, which is relatively simple and offers the added benefit of privacy. The same comments for direct ownership would then apply.
- Ownership through a non-natural person, either directly through a company or a trust and company structure, provided that one of the new reliefs applies to avoid the ARPT and the extension of CGT. Privacy will be maintained and there may also be good commercial or other non-tax reasons for such a structure. Beware that any purchase through a non-natural person before Royal Assent of the FB 2013 will trigger the 15% rate of SDLT.
- Ownership through a trust structure, perhaps a double trust structure, which will avoid the 15% rate of SDLT, the ARPT and the extension of CGT. Privacy will be maintained and the trustees may claim main residence relief (for owner occupiers) when the property is eventually sold. An exposure to IHT for a single trust can be mitigated by third party debt or the double trust structure leaving only the surmountable issue of 10 year charges for the trustees.