Last week the Government published the draft legislation on the Annual Residential Property Tax (“ARPT”) after a period of consultation. In the Budget earlier this year, the Government announced they would introduce an annual charge on companies and partnerships holding UK residential property over £2m. The rationale for this was that individuals who have acquired UK property through a company or partnership may have used such vehicles in order to avoid stamp duty land tax (“SDLT”), commonly known as “enveloping”. The draft legislation seems intended to apply only to owner occupied properties and therefore will capture or deter only a limited class of “enveloping” transactions.
In addition, the intention to impose a CGT charge on gains made by such vehicles was confirmed, subject to further consultation. Also, HMRC have confirmed that where a property owning vehicle was acquired by a company and the property was hived up to the purchaser or transferred to another company in the purchaser’s group following acquisition would not be capable of a claim for group relief as it is tax avoidance if the reason the transaction was effected in this way was to avoid the charge to SDLT which would arise if the property was acquired directly.
What is ARPT?
ARPT is a tax payable by companies, partnerships or collective investment schemes that own high value residential property in the UK valued at £2 million or more. It will commence on 1 April 2013 and will be charged in accordance with the relevant chargeable period (1 April to 31 March of each year).
The amount of ARPT is calculated using a banding system based on the value of the property. The rate bands are as follows:
Click here to see table.
For ARPT the value of the dwelling (not including a new dwelling or an existing property which has been altered to become a dwelling) to be used is its value:
- on 1 April 2012, if the relevant entity owned the interest in the property on this date; and
- the date when the interest in the property was purchased or acquired, if later.
This valuation figure will be used for the first 5 ARPT return periods beginning 1 April 2013. All properties within ARPT may therefore need to be revalued again in 5 years time. The relevant entity will have to self assess the market value of the property on an arms length sale between a willing buyer and willing seller. An undervaluation could give rise to penalties, interest and increased ARPT being due and payable.
Importantly there are reliefs available which, broadly, restrict ARPT to owner occupied dwellings. If the UK residential property is only used for part of the chargeable period or a relief is available for part of that period, then ARPT applies on a proportionate basis.
Who is liable for ARPT?
ARPT only needs to be paid when UK residential property is owned by:
- a company or other corporate body. However a company that owns property in its capacity as trustee of a settlement or as nominee is not subject to ARPT (although the beneficiary maybe);
- a collective investment vehicle (such as a unit trust or open ended investment company; or
- a partnership which includes one, or more, of the above.
What type of residential property does ARPT apply to?
ARPT applies to residential properties (“dwellings”) that are physically located in the UK. A dwelling may be all or part of a residential or mixed use property including gardens and grounds. If a dwelling is part of a larger, mixed use property that has parts not used for residential purposes, only the residential part would have ARPT payable on it.
Where companies and individuals connected to the company own multiple interests in a dwelling, these will be added together for the purpose of ARPT.
Other residential uses such as hotels, guest houses, boarding schools accommodation, hospitals, student halls of residence, military accommodation, care homes and prisons are not dwellings and therefore are not subject to ARPT.
What reliefs are available to reduce or eliminate any ARPT due and payable?
Broadly, a dwelling might get relief from ARPT if it is:
- let to a third party on a commercial basis and it is not at anytime occupied by the owner or a person connected with the owner;
- held for charitable purposes;
- open to the public for at least 28 days per year;
- part of a property trading business and it is not at anytime occupied by the owner or a person connected with the owner;
- for the use of employees of the company, for the company’s commercial business and where the employee does not have an interest (directly or indirectly) in the company of more than 5%. The employee’s duties must not include services for any present or future occupation of the property by someone connected with the company; or
- farmhouses, if they are occupied by the farmer who farms the associated farmland full time and where the farmhouse is of an appropriate character.
Also, a dwelling held as part of a commercial property development business can get relief but it must meet the following conditions:
- the property is bought or acquired as part of a property development business;
- the property was purchased with the intention to re-develop and sell it on;
- the property is not at any time occupied by the owner or anyone connected with the owner.
How is ARPT accounted for?
ARPT is accounted for by self assessment and the person liable has to complete an ARPT return. This return must be completed and payment made by 30 April at the beginning of each chargeable period. This means that the tax is due in advance for the chargeable period – adjustments will be made in later periods if required. For the first ARPT period only, 1 April 2013 to 31 March 2014, as the Finance Bill will not have received Royal Assent until July the return will be due by 1 October 2013 and payment due by 31 October 2013.
If the dwelling first falls within ARPT on a date after 1 April in a chargeable period, then the return and payment are due within 30 days where purchased or 90 days where the dwelling is newly built. Reliefs are claimed on the ARPT return. If a dwelling that falls within ARPT is jointly owned, all the owners are jointly responsible for completing and sending the ARPT return.
How does this interact with the 15% SDLT charge on high value properties?
It is the Government’s intention that 15% SDLT charge and ARPT are aligned so that those persons who pay the 15% SDLT charge on acquisition are also subject to ARPT if the circumstances remain the same. To achieve this, the Government have extended the reliefs which apply to ARPT to also apply to the 15% SDLT charge. They have also removed the 2 years trading history condition in the property developers’ relief.
So where does this leave us now?
The ARPT reliefs are to be welcomed. As a result the charge appears to be narrowly targeted at owner-occupied properties. It looks like the forthcoming CGT charge at 28% of gains after April 2013 will also target the same properties, when held through a vehicle. It seems that Government are anxious not to discourage property rental businesses activity and property development but this three pronged approach to owner occupiers is intended to extract significant tax from a small section of the market. Where the main motive for using a company, partnership or collective investment scheme is not SDLT saving but to keep the identity of the beneficiary confidential or for inheritance tax purposes the tax package discussed here is a significant handicap.
Remember that this is only draft legislation and the Government are consulting in relation to this legislation until 6 February 2013.
We would suggest that all current arrangements involving companies, partnerships and/or collective investment schemes owning high value residential property in the UK are reviewed to determine the impact of ARPT and CGT on these arrangements. Recent murmurings from the Stamp Taxes Office on their approach to SDLT on the extraction of property from SPV companies means that unwinding such structures should be undertaken with considerable care. Careful consideration should be given to new arrangements when acquiring UK residential property as there could be a 15% SDLT charge on acquisition then ARPT and CGT going forward.