Surprise measures to increase the scope of certain taxes on high-value residential property acquired by and/or held through corporate envelopes were announced by the chancellor in the UK budget on March 19 2014. The draft Finance Bill 2014 has since been published and provides some clarification of these proposed changes.
In addition, the Treasury published its promised consultation on the introduction of a capital gains tax charge on non-residents who dispose of UK residential property. This will take effect on April 1 2015.
The higher rate (15%) stamp duty land tax has been extended to apply to acquisitions of residential properties worth more than £500,000 by 'non-natural persons' – broadly speaking, companies, partnerships with at least one corporate partner and collective investment schemes.
The annual tax on enveloped dwellings (ATED) – a tax introduced in April 2013 to sit alongside higher rate stamp duty land tax and the ATED-related capital gains tax charge for UK residential properties owned by non-natural persons and worth more than £2 million – has been extended to apply:
- with effect from April 1 2015, to properties worth between £1,000,001 and £2 million (valued as of April 1 2012 or the date of acquisition, if later) at the rate of £7,000 for the chargeable period from April 1 2015 to March 31 2016; and
- with effect from April 1 2016, to properties worth between £500,001 and £1 million (valued as of April 1 2012 or the date of acquisition, if later) at the rate of £3,500 for the chargeable period from April 1 2016 to March 31 2017.
The 28% ATED-related capital gains tax charge has been extended to apply to:
- properties worth between £1,000,001 and £2 million on gains accruing on or after April 6 2015; and
- properties worth between £500,001 and £1 million on gains accruing on or after April 6 2016.
In addition, the ATED rates for properties worth more than £2 million have increased in line with the consumer price index, as expected. These bands and the applicable rates for the chargeable period from April 1 2014 to March 31 2015 are as follows:
- property valued at more than £2 million and up to £5 million – £15,400;
- property valued at more than £5 million and up to £10 million – £35,900;
- property valued at more than £10 million and up to £20 million – £71,850; and
- property valued in excess of £20 million – £143,750.
In his Autumn Statement in December 2013 the chancellor announced that, with effect from April 6 2015, non-UK residents will be liable for capital gains tax on gains made on disposals of UK residential property. The recently published consultation in this regard provides an outline of the proposed details of this new charge, but many unanswered questions remain on which the government is seeking views. Accordingly, the tax may look very different from the existing proposals by the time that it is introduced.
Briefly, the proposals are as follows:
- The new capital gains tax charge on non-residents will focus on "property used or suitable for use as a dwelling" and, unlike the ATED-related capital gains tax charge, will include residential property used for letting purposes.
- There will be exclusions for certain types of property in communal use – for example, boarding schools and nursing homes.
- The charge will apply to individuals, partnerships, trustees and non-resident companies (to the extent that they are not caught by the ATED-related capital gains tax charge). Funds that are not closely held will not be caught; nor will pension funds, real estate investment trusts or their foreign equivalents.
- Principal private residence relief will be available in appropriate circumstances. However, changes have been proposed to remove the ability to elect one's main residence, in order to prevent non-residents from always electing their UK property as their main residence. These changes will also affect UK residents.
- Under the new capital gains tax charge, the rates for individuals will be either 18% or 28% according to their status as basic or higher/additional rate taxpayers.
- There will be a mechanism to declare losses and offset them against gains from the sale of UK property, where appropriate.
- The introduction of a withholding tax regime similar to that for stamp duty land tax has been proposed, ideally to sit alongside a self-assessment option.
The consultation closes on June 20 2014.
The expansion of the existing tax regime for UK residential property held by non-natural persons was unexpected. For new acquisitions of UK property where there is no available relief, the increased stamp duty land tax cost is likely to be a significant deterrent to such structures for properties worth £2 million or less. However, the expansion of ATED may in some cases simply be regarded as an additional cost of maintaining such a holding structure, albeit an unwelcome one.
Although the extended ATED-related capital gains tax charge will be an issue for many, the introduction of a new capital gains tax charge for non-residents disposing of UK residential property with effect from April 6 2015 is much further reaching and, subject to the application of a relief where available, will catch gains on disposals of UK residential property of any value by individuals and most other entities.
Nevertheless, there may continue to be situations in which, on balance, there are advantages to holding UK residential property through a corporate envelope, rather than by an individual or trustees directly. Careful consideration of all the relevant circumstances will be required to determine whether this may be the case.
Accordingly, any non-UK resident who owns or is considering acquiring UK residential property through a holding structure or otherwise may wish to review the position as the details of the proposed new capital gains tax charge for non-residents become clearer, in order to determine the best way to hold such property in the future.(1)
For further information on this topic please contact Anthony Thompson or Nicole Aubin-Parvu at Wragge Lawrence Graham & Co LLP by telephone (+44 20 7379 0000), fax (+44 20 7379 6854) or email (firstname.lastname@example.org or email@example.com).
(1) For further details on the budget measures and consultation proposals, please see www.wragge-law.com/insights/a-closer-look-changes-and-proposals-to-the-taxatio/.