The Taxation of high value residential property in the UK -Draft legislation published

In this year's Budget the Chancellor proposed major changes to the taxation of high-value UK residential properties, i.e. those worth £2m or more.

Briefing - 12/12/2012

The aim was to stop the (perceived) avoidance of Stamp Duty Land Tax (SDLT) through the use of companies.

The scope of the changes, however, applied not just to SDLT but also to Capital Gains Tax (CGT) and the introduction of a new annual charge.

Some of these changes are already in place, such as increases in the rate of SDLT so that individuals and trustees acquiring a UK residential property worth more than £2m now have to pay 7% SDLT but the rate increases to 15% where such properties are acquired by "non-natural persons" - which includes companies, partnerships with a corporate member and collective investment schemes but not where trustees or individuals, whether onshore or offshore, buy directly.

Further changes have yet to take effect.

First, an Annual Residential Property Tax "ARPT" is planned from April 2013.  This is a charge of up to £140,000 each year in relation to high value properties held by non-natural persons.

Secondly, a CGT charge is proposed where such properties held by non-UK resident, non-natural persons are sold at a gain.

Some of the draft legislation was published yesterday, 11 December 2012, but the draft CGT legislation has been delayed until mid January 2013. 

Further detail is undoubtedly still needed on a number of aspects of the CGT changes.  The unfortunate consequence of this push back is to narrow the window for planning or reorganising should that be appropriate.

However, the news is perhaps rather better than had been expected with some key elements of the changes having already been announced:-

  • The changes will not now apply to trustees who hold high value properties directly since the definition of "non-natural person" is now the same for SDLT, ARPT and CGT, i.e. as above, companies, partnerships with a corporate member and collective investment schemes.
  • The new CGT charge will only apply to any increase in value of properties after 6 April 2013.  In other words there is a statutory rebasing at that date.
  • A number of additional exemptions are proposed for business such as property developers and buy to let investors.
  • The rate of CGT on property gains will be 28% but there will be a form of tapering relief for properties which are sold for just over £2m.  This is a marked improvement of the proposed "cliff edge" charge where a sale for just under £2m would have attracted no CGT but one just over would have been fully taxable.
  • Another piece of good news is that the earlier proposal to apply CGT to disposals of entities such as companies which own high value UK residential properties, has now been dropped.
  • One area to watch is a new proposal to extend the CGT charge to apply to UK residents as well as non-UK resident non-natural persons.  UK residents of course already pay tax on chargeable gains, but at a lower rate where corporation tax applies.  It is intended that the new CGT charge would take precedence.  This is under consideration by HMRC and they plan to consult on it in January 2013.

The new Annual Residential Property Tax

The draft legislation was published yesterday, confirming that the ARPT will only apply to those non-natural persons to whom the new 15% SDLT applies, as specified above.

The rates of the proposed ARPT are as previously proposed.  For values between £2m and £5m the annual charge is £15,000 rising to £35,000 for the £5m to £10m band; £70,000 for properties worth between £10m and £20m and £140,000 for properties worth £20m or more.

Generously, the government is to offer a free valuation service, details of which will be published next Spring, but this will only be available where values fall within 10% of one of the thresholds.

For cases where ARPT is relevant, a tax report will need to be submitted annually - by 1 October 2013 for 2013/2014 and by 30 April following the end of the tax year in future years.  For ARPT purposes properties will only need to be valued every five years.  A clearance system is to be introduced to enable individuals to self-appraise the value of their property when it is worth close to one of the charging thresholds and then ask HMRC to agree the valuation before the ARPT report is filed.

Other important elements of the proposals include:-

  • Reliefs from ARPT for genuine businesses carrying out genuine commercial activity such as property development, rental or trading businesses and a general exemption for charities.  However, any property rental must be on fully commercial terms and to third parties, not between connected persons.
  • The proposed requirement for a property development business to have been trading for a period of two years has been dropped and a provision has been included allowing the development of commercial property from residential property to be excluded from the ARPT.


What should we do now?

One possible planning opportunity will be in moving high value properties up from companies into a trust above.  This might involve the liquidation of the company and careful consideration of inheritance tax issues such as the 10 year charge.

This is only a very broad overview and any planning will have to be based on the precise detail of the new legislation.  We must also remember that each client will have different circumstances - one solution will not fit all. 

It is suggested that in all affected cases the individuals involved should consider what is the primary purpose of the existing structure and whether that is still satisfied and whether the costs of maintaining the structure or of reorganising or scrapping it are themselves warranted, i.e. a cost benefit analysis taking account of the costs of dismantling and any associated tax charges.

For CGT the automatic rebasing to April 2013, means that restructuring will not necessarily be required before that date.  However, if the annual charge is to be avoided action must be taken before April 2013.  Cases that are going to be affected should be reviewed and information gathered to enable detailed planning to be carried out.  This includes not only a tax-focused review and/or computation but also consideration of practical issues, particularly those that are time-sensitive, for example the availability or otherwise of refinancing, its costs and the time needed to arrange it, the availability of valuation advice and its cost, especially for properties at or near a threshold and whether landlord's consent might be needed for any reorganisation.

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