UK: Changes To UK High Value Residential Property Taxation: Draft Legislation Published

11 December 2012: The Government has simultaneously published the response to its Consultation on the Taxation of High Value UK Residential Property and certain draft clauses of the 2013 Finance Bill. The combined publications give much more certainty on the new tax regime for such properties and contain significant relaxations of some of the original proposals announced in May.

What has been announced?

We will consider the proposed legislation in terms of the two main taxes it covers: Annual Residential Property Tax (ARPT) and Capital Gains Tax (CGT).

Annual Residential Property Tax (ARPT)

APRT is the new term for what was originally proposed as the "annual stamp duty charge".

The ARPT will be applied to certain non-natural persons (NNPs) owning residential properties valued in excess of £2 million, from 1 April 2013. The rates will be:

It has now been confirmed that the non-natural persons (NNPs) which may be taxable under the ARPT are restricted to:

• Companies, where that company has a beneficial interest in such a property (i.e. not where it acts as mere nominee for an individual);
• Partnerships, where one or more partners is a company; and
• Collective Investment schemes.

It has been confirmed that trustees (including corporate trustees) will not be subject to the APRT where they hold property directly.

Note that the tax residence of the NNP is not relevant for the ARPT tax.

An important development since the initial Consultation is that a number of important exemptions from the ARPT will be put in place for:

• Property development businesses (with no requirement, as originally suggested, for a 2-year track-record in such developments)
• Properties let out as part of a property rental business where let out to third parties on a commercial basis (in most cases this will exempt properties acquired as "buy-to-lets")
• Farmhouses and properties held by trading companies for the use of employees
• Certain other minor exemptions will apply

The assessment and collection mechanism for the ARPT will consist of the following:

• For properties owned on 1 April 2012 by chargeable NNPs, 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.
• 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 (CGT)

The Consultation Response (no draft legislation will be available for CGT until early 2013) 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.

However, there are significant relaxations of the original proposals:

• Trustees will not be within the charge to CGT on direct disposal of such properties: the definition of NNP used for CGT purposes will be the same as that used for the ARPT (except that only non-UK resident NNPs will be within the CGT charge, pending further consultation).
• The same exemptions will apply as for the ARPT, for instance for properties let commercially to third parties and for property developers.
• Only gains accruing since 1 April 2013 will be assessed: i.e. the proposal to tax gains deriving from the whole period of ownership has been abandoned.
• The CGT charge will not be extended to the disposal of shares or units in an NNP: it will only apply where there is a direct sale of a UK property interest by the NNP. The sale of, for instance, shares in an NNP by a non-UK resident will continue to be exempt from UK taxation.

The rate of CGT applicable to disposals will be 28%. The Government is now further consulting on whether UK-resident NNPs which pay the ARPT should also be brought within the scope of the 28% CGT charge.

What action should be taken now?

Thankfully, those running commercial letting or development businesses are now unlikely to be affected by the changes and may not have to take any action. However, it is important to look at the changes on a property-by-property basis particularly where there is mixed use within a portfolio.

Certain structures owning properties which are not exploited commercially or which are occupied by family members or other connected persons may need to consider restructuring. The decision will need to be made on a case-by-case basis and will be influenced by:

• Any existing latent gains in the structure which might be attributed to UK-resident beneficiaries or participators on restructuring
• Stamp duty considerations on restructuring
• The existing inheritance tax benefits of the current structure
• The possibility of being able to sell shares in a company at a later date free of stamp duty and capital gains without restructuring
• The magnitude of the annual charge
• Confidentiality and asset protection considerations

Depending on the ultimate goals of the client, replacement structures might include:

• Personal ownership
• Ownership through a nominee entity
• Ownership through a partnership with no corporate members, or where a corporate member has a minimal capital share
• Ownership through a trust, which will not be subject to the new regime

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.