On 31 January, the Treasury published the responses to consultation and draft legislation for the new capital gains tax regime that will apply on the sale of high-value UK residential properties. There was also updated draft legislation for the annual residential property charge.
This alert sets out the key points arising from the new draft legislation. For further information about the previously released draft legislation, please see our client alert on this topic from December 2012.
The new draft is broadly the same as previously announced: The charge will be introduced from 1 April 2013 and applies to non-natural persons, such as companies, collective investment schemes and partnerships with a corporate partner, owning UK residential property valued in excess of £2 million.
The substantive changes to the draft legislation are mainly to the available reliefs:
- The clawback provisions applicable where a property company no longer qualifies for relief have been extended; and
- Two further reliefs (applying to unoccupied rental properties being prepared for sale and financial institutions acquiring properties in the course of lending) have been included.
Capital Gains Tax
The draft legislation confirms the Treasury's previous announcements that capital gains tax will be charged at a rate of 28% on gains arising after 6 April 2013 on a direct sale of UK residential property by non-natural persons who are subject to the annual charge. The reliefs applicable to the annual charge are also applicable to the charge to capital gains tax.
As previously stated, the new charge to capital gains tax will not apply to trustees (although they may be subject to tax under other, existing provisions). However, contrary to the Treasury's previous announcements, the charge will apply to both UK resident and non-UK resident non-natural persons. To ensure that UK resident non-natural persons are not subject to double taxation, the draft provides that they will not be charged to corporation tax on gains which are subject to the charge to capital gains tax.
The charge will only apply to "ARPT-related gains": The ARPT-related gains are essentially the gains from 6 April 2013 or the day of acquisition (if later). If, for part of the period of ownership, the property was exempt from the Annual Charge, there is a reduction in the amount of gain subject to the capital gains tax charge to reflect this period of exemption.
In addition, where a UK resident non-natural person disposes of a property held pre-6 April 2013, the gains arising on a disposal will be split between pre-6 April 2013 gains and from 6 April 2013 gains. The gains treated as arising pre-6 April 2013 gains will be charged to corporation tax, if applicable, while gains from 6 April 2013 will be subject to capital gains tax. A seller may elect to be charged to capital gains tax instead for the whole gain and must make an election on their tax return if they wish to do so.
ARPT-related gains will not be attributed to participators in offshore close companies, nor will they be matched to benefits received by settlors or beneficiaries under the matching provisions, however any non-ARPT-related gains arising on a disposal will still be available to be attributed or matched under existing legislation.
Companies which currently benefit from "no gain, no loss" treatment on transfers between companies in the same group will not benefit from this treatment in relation to the charge to capital gains tax. Each intra-group transfer will be treated as a disposal for the purposes of the new charge. Finally, there are fairly complex provisions regarding the use of any losses realised from the sale of high-value UK residential property. In essence, losses can only be used to offset future gains arising from the sale of high-value UK residential property. There are also provisions that deem a minimum consideration of £2 million on sale when calculating the loss available.