Since the publication of the consultation paper "Ensuring
the fair taxation of residential property transactions" in
March 2012, which set out proposals for a new annual charge and
capital gains tax charge on non-natural persons ('NNPs')
holding high value residential property, NNPs have been awaiting
the publication of the Finance Bill 2013 with some anxiety. Now
that (at least some of) the detailed legislation has been
published, time is of the essence if action is to be taken before
the proposed
rules come into force.
There is good news and bad news for NNPs. Clarification and
exemptions announced mean that neither the annual charge nor the
capital gains tax will be as far reaching as originally feared.
However, as always the devil is in the detail of the draft SDLT
rules issued today, but although the proposals relating to the new
capital gains tax rules are refined in HM Treasury's summary of
responses to the consultation, draft legislation setting out the
details of these rules has not been published and is not expected
until January 2013. NNPs may well need to take steps before then to
ensure that they can complete any
restructuring before the new annual charge rules come into force
on Monday 1 April 2013.
1. Annual residential property tax ('ARPT')
The ARPT will be payable by NNPs who have a beneficial interest
in a residential property worth
more than £2million.
1.1 Who will be liable?
Liability to the ARPT will be restricted to companies, collective
investment schemes and partnerships which have a company as a
partner, wherever they are resident. Trusts, whether onshore or
offshore and whether or not they have personal or corporate
trustees, will not have a liability to the ARPT. Further, a number
of significant exemptions will apply to ensure that 'genuine
businesses carrying out genuine commercial activity' are
excluded from the charge.
Relief will be available for:
(a) Properties exploited in a property development, trading or
rental businesses provided the property is not occupied by a
'non-qualifying person'.
The definition of 'non-qualifying person' is extremely
wide and will include any beneficial owner person connected with
them, including for example, the child or other relative of the
settlor of a trust which holds residential property through a
NNP.
The current requirement for a property development business to
have been carried on for two years has been dropped for the
ARPT.
(b) Properties exploited as part of a trade under which the
property is available for use or enjoyment by the public at least
28 days a year on a commercial basis.
(c) Properties owned to provide employee accommodation.
(d) Properties held by charities for charitable purposes.
(e) Farmhouses, which are of a 'character appropriate' to
the land being farmed and are occupied by farm workers and also
certain other properties.
It should be noted that even where a relief is available, it will
have to be claimed each year. The first returns will need to be
filed by 1 October 2013. In future years returns will need to be
filed by 30 April each year. Any charge due must be paid by 31
October in each year.
1.2 How much will they pay?
The rate of the ARPT is unchanged:
Taxable value of
property
Annual chargeable amount
£2 million - £5
million £15,000
£5 million - £10
million
£35,000
£10 million - £20
million £70,000
Greater than £20
million
£140,000
The 'chargeable period' will run from 1 April to 30 March
of each year (rather than following the tax year). Where the ARPT
is applicable for part only of a chargeable period, the annual
chargeable amount will be apportioned accordingly.
The ARPT will be index-linked (annually to the CPI), but the
thresholds will remain constant in nominal terms. Residential
properties will need to be valued every five years, with the first
valuation point being 1 April 2012 to see which level of charge
applies.
2. Capital gains tax
The new capital gains tax regime will apply to the disposal of a
residential property for more than
£2 million on or after 6 April 2013.
2.1 Who will be liable?
Non-UK resident NNPs holding high value residential property will
only come within the scope of the new capital gains tax charge if
they fall within the scope of the ARPT, so that those non-UK
resident NNPs who qualify for the reliefs set out above will not be
subject to the capital gains tax charge.
This change ensures consistency between the two charges – a
consistency that was lacking under the original proposals. In
particular this will be welcome news for non-UK resident corporate
trustees and also those who rent properties to third parties, who
will now remain outside the scope of the capital gains tax charge
where they hold high value
residential property directly.
2.2 How much will they pay?
(a) Gains subject to the charge
In acknowledgement of the fact that non-UK resident NNPs have
hitherto been outside the scope of UK capital gains tax, capital
gains tax will only be payable on gains attributable to increases
in value post 6 April 2013 i.e. a rebasing is
available.
The mechanism for the rebasing and whether a formal application
will have to be made to benefit from the rebasing should be
clarified in January 2013.
(b) Rate of tax
The applicable rate of capital gains tax will be 28% with a
'tapering relief' available where the value of the property
falls 'just' over the £2 million threshold.
2.3 The sting in the tail
The proposed rate of tax payable by non-UK resident NNPs is above
that currently paid by UK resident companies. The Government is
therefore to consider whether to extend this capital gains tax
charge to UK resident companies as well.
3. Stamp Duty Land Tax
When the consultation was announced in March this year, the rate
of SDLT on purchases of residential property by NNPs was increased
to 15%. These rules will now also be amended to incorporate the
same reliefs as will apply for the ARPT, so that the 7% rate will
apply to persons who would not be subject to the APRT. Payment of
the 7% rate will be conditional on the
appropriate relief applying for three years following the purchase
and the property not being occupied by a non-qualifying person in
that time.
However, the amendments will only be effective from the date of
Royal Assent of the Finance Bill 2013 (which is expected in
June/July 2013) and so there will remain a period of time during
which the existing rules will continue to apply.
Conclusion
The detailed rules announced today, in general represent a
sensible reduction of the scope of the new rules, while preserving
their original intention. Many NNPs who had previously contemplated
a frenzied period of restructuring to put in place a new structure
before the 6 April deadline will now need to reconsider to see
whether any action is in fact required. Some may now fall entirely
outside the scope of the new charges and others may consider them
an acceptable burden, particularly when the benefits of NNP
structures from a privacy, inheritance tax and (following the Court
of Appeal judgement in Prest v
Prest) divorce perspective.
In considering any options for new property purchases, NNPs and
their beneficial owners should consider the impact of the General
Anti-Abuse Rule ('GAAR') which will also apply from the
date of Royal Assent of the Finance Bill 2013. The GAAR provides
for the re-characterisation of transactions that are considered
abusive so that any tax advantages can be counteracted. While it
seems that the GAAR is unlikely to apply to any steps taken before
Royal Assent, the creation of any new structures or restructuring
carried out after that date will be subject to the new rules.
For those looking for alternative structure and seeking long term
stability, there are further uncertainties. While, in the Autumn
Statement, George Osborne appeared to rule out any new taxes on
property for this Parliament, the questions of; whether that ARPT
will simply be a pre-cursor to a mansion tax that applies to all
high value residential property and whether all non-resident
property owners will in time be brought within the scope of capital
gains tax remain.
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.
