The UK Chancellor has today (19 March 2014) announced an extension of existing taxes affecting UK residential property held through companies. The detail of the changes, and of any transitional rules, will be contained in draft legislation. The following briefing is based on the UK Government Press Releases issued on Budget Day 2014.
SDLT
From 20 March 2014 stamp duty land tax ("SDLT") will apply at 15% to the purchase by a company of UK residential property worth over £500,000. Before this change, the 15% rate only applied to property purchases for over £2m. Under a transitional rule, where exchange occurred before 20 March 2014 then the pre-existing SDLT rates will continue to apply.
Annual tax on enveloped dwellings ("ATED")
From 1 April 2015 ATED will be extended to properties worth between £1m and £2m, with an annual charge of £7000. From 1 April 2016 ATED will be further extended to properties worth between £500,000 and £1m, with an annual charge of £3,500. At present ATED applies only to properties which were worth over £2m on 1 April 2012 or on later purchase.
Under the current ATED rules properties which were valued on 1 April 2012 at £2m or under would have remained outside the scope of ATED until at least 2018 – and would only then have come within ATED if valued at over £2m in April 2017. An April 2012 valuation of under £2m that provided protection against the possibility of an ATED charge until 2018, may no longer do so. It appears that if at 1 April 2012 properties fell within the new thresholds then as from 1 April 2015 (for properties worth over £1m) or April 2016 (for properties worth between £500,000 and £1m) ATED will apply.
Capital gains tax ("CGT")
Furthermore companies affected by the new ATED bands will be subject to CGT at 28% on the sale of UK property. At present CGT only applies to companies selling properties which fall within the current ATED band ie which were worth over £2m on 1 April 2012 or on later purchase. This extension of CGT will apply in relation to a sale (normally exchange of contracts) on or after 1 April 2015 of properties worth between £1m and £2m on the valuation date and to sale on or after 1 April 2016 of properties worth between £500,000 and £1m at the valuation date. The extended charge will apply only to the element of the gain which accrues after 1 April 2015 or 1 April 2016 ie for purposes of the extended charge the property is rebased to 1 April 2015 or 1 April 2016.
We are currently awaiting further detail on the Government's new CGT charge on disposals by non-UK resident individuals of their UK residential property which was announced in the Chancellor's Autumn Statement in December 2013.1 However, it seems likely that, from a CGT perspective, once the new charge on individuals and the extension announced today of CGT on sales of UK property by companies become effective to a great extent they will render neutral the choice of holding UK property through a company or individually.
Conclusion
We have not yet seen draft legislation for the extension of property taxes announced today, although this is likely to be available shortly. The new legislation is likely to make it unattractive to hold lower value UK residential property through a company. However, the reliefs in relation to letting, redevelopment and trading in residential property currently available under the ATED rules are likely to be preserved in connection with their extension announced to day with the result that the newly extended measures would primarily affect owner-occupied properties rather than those used for genuine commercial purposes.
Footnote
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