UK: Update On Proposed Changes To Taxation Of Residential Property In The UK

Article by Verfides

On 23 March 2012 we published a Client Alert on the News section of our Website ( http://www.verfides.net/images/uploads/Budget_2012.pdf ) reporting on the announcements made in the UK Budget. One of the most important of those announcements was the proposal to make major changes to the taxation of high value residential property in the UK.

The Government has now provided further details of the changes it intends to make in a Consultation Document. The Consultation period runs until 23 August 2012, after which draft legislation will be published in the Autumn, for inclusion in the 2013 Finance Bill. This article reports on the Consultation Document.

Recap

The 2012 Budget introduced some immediate changes to the taxation of residential property transactions:

• The introduction of a general 7% Stamp Duty Land Tax (SDLT) rate for the purchase of residential property worth in excess of £2 million
  
• The introduction of a 15% "super rate" of SDLT for properties worth in excess of £2 million when acquired by a company or certain other non-natural persons
  
• The outlawing of schemes artificially using stamp duty sub-sale relief to avoid duty on property purchases.
  

In addition, proposals were announced for further tax charges on high value residential property held by non-natural persons:

• An annual SDLT charge; and
  
• The imposition of a capital gains tax on the sale of such properties
  

The aim of the proposals was to deter people from buying and holding residential property through corporate and other "envelopes", as it was assumed that these vehicles are then used to dispose of such property free of SDLT by transfer of the interest in the holding vehicle rather than the property itself.

Consultation

The Consultation Document has provided further details of the Government's proposals although, dependent on the responses received, these may be subject to change.

Annual Charge

It is confirmed that an annual tax charge will be applied to companies and some other non-natural persons owning residential properties valued in excess of £2 million. The rates are confirmed as:

Further details were given regarding the annual charge:

• It is confirmed that it will only apply to certain "non-natural" persons. This includes companies, other bodies corporate (it is not clear whether this will catch UK LLPs), collective investment schemes and partnerships including one or more such entities.
  
• A company acting solely in its capacity as a trustee, or when it acts merely as nominee with no underlying beneficial interest in the property, will not be caught.
  
• A property development business will be excluded from the charge, but only where it has been operating for two years. It is expected that the two year requirement will raise significant objections during the consultation process.
  
• For properties owned on that date, the charge will be based on the open market value at 1 April 2012; the acquisition value will be used if purchased later. This value will then be used for the purposes of the annual charge until 1 April 2017 – a valuation will only be required every five years.
  
• It will be the responsibility of the taxpayer to self-assess the value of the property and return in on an annual tax return. Although a non-professional valuation is permissible, the annual return can be the subject of an HMRC enquiry and penalties may be levied for under-valuation. HMRC will not however levy penalties where a suitably qualified professional valuer has been commissioned – guidance will be provided on this point.
  
• The return will require details of the address of the property, the Land Registry title, the beneficial owners of the property and their address and the self-valuation and applicable band. It is unclear whether the term "beneficial owner" refers, in the case of a company, to the company itself or to its ultimate shareholders.
  
• The annual period of account for each return will begin on 1 April each year; the return will be due on 15 April of the same year – i.e. 15 days after the start of the period of account, together with the full up-front payment for the year (the first return and payment for the period of account 1 April 2013 to 30 March 2014 will not however be due until 1 October 2013).
  

Capital Gains Tax Charge on Sale

The Consultation Document confirms the proposal for a capital gains tax charge on certain non-resident non-natural persons when they dispose of UK residential property from 1 April 2013. The charge is again restricted to the sale of residential property worth in excess of £2 million.

Two significant points to bear in mind:

• No rate has been announced and this will not form part of the consultation process – it will instead be decided by the Chancellor in the March 2013 Budget.
  
• The gain will be assessed on the entire period of ownership – i.e. there will be no rebasing of the asset for tax purposes at the time the legislation comes into effect.
  

Other details confirmed or announced in the Consultation:

• Non-natural persons will include all those subject to the Annual Charge, but in addition also trusts (whether or not the trustees are individuals, although bare trust or nominee arrangements are excluded), personal representatives, clubs and associations and "entities that exist in other jurisdictions that allow property to be held indirectly." The exact scope of this last phrase is not yet defined.
  
• Partnerships will continue to be treated as transparent for capital gains tax purposes, meaning that any tax liabilities on the disposal of a partnership asset will accrue instead to the partners. Such partners will then only be subject to a UK capital gains charge where they are a "non-natural" person. Again the treatment for a UK LLP, which is a body corporate, is unclear.
  
• The capital gains charge will be extended to disposals of interests in holding vehicles, 50% of whose assets by value consist of UK residential property. This will include shares in non-resident property holding companies but it is not clear if it will apply to the disposal of an interest in a partnership.
  

Verfides' Comments

Whilst we welcome further clarification of the proposed changes, there are still a number of uncertainties and contradictions which will need to be addressed during the consultation process.

Due to the scope of both the annual and capital gains charges (particularly the fact that gains will be levied from April 2013 on the entire ownership period) there is no doubt that restructuring will be required in many cases for existing holding structures before 1 April 2013.

When considering suitable replacement structures, it will be important to ascertain the reason for an individual using a corporate or other holding vehicle. In our experience, the main considerations are:

• Confidentiality/non-disclosure of ultimate beneficial owner
  
• Asset protection and succession planning (particularly when combined with a trust)
  
• Elimination of exposure to UK Inheritance tax
  
• Elimination of exposure to UK Capital Gains Tax
  

Therefore, whilst it might appear at the outset that the natural replacement for a corporate structure is direct personal ownership, this will not be suitable for many clients who value above all else confidentiality. It appears at present that certain nominee and partnership structures may be the most suitable replacements but this will depend to some extent on the outcome of the consultation process.

There is a limited window of opportunity to restructure. Given that draft legislation will be published in September 2012, to become law by April 2013, owners with structures that may be affected should be seeking advice now. Please contact Verfides for an initial discussion of the options available to you.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.