Forgive me Father; it has been over two months since my last tax bulletin. I know I should be making excuses right now but, frankly, I can't bring myself to do it. I could have blamed the government, for making us wait for the consultation document but He wouldn't be impressed with that knowing, as He does, that there are a hundred other topics I could have written about. I could have also claimed I was too busy but, again, there is little chance that would succeed. The shameful truth is that I was away on holiday in Sicily for a little while and I think I must have over-dosed on pasta or something as I just felt so lethargic on my return.

But, I have now been spurred into action by the release, at long last and in the dying moments of May (talk about leaving it to the last minute guys!) of the condoc on the extension of CGT and the new annual charge.

So, was it worth the wait?

It is certainly an entertaining read. It is full of the usual government double-think and euphemisms (including my personal favourites: 'fairness' and 'paying their fair share'). However, there is some real substance here and some real problems.

The headlines

  • CGT will apply only to disposals of property worth over £2m.
  • It will, however, apply to any non-natural person – including trusts, collective investment schemes and so on.
  • It seems that partnerships will not be taxed, only the members if they are non-natural persons.
  • CGT will somehow be extended to a disposal of shares in a company, where more than 50% of its value is in UK land.
  • The new annual charge will, as far as possible, apply only to those entities caught by the new SDLT charges (thereby excluding, for instance, trustees).

My initial thoughts

Firstly – phew! I had feared that the new CGT charge would apply to all disposals of UK property by non-natural persons – but we have clarification that it will only apply if the disposal consideration exceeds £2m. Whilst this is a welcome relief it is also illogical – the government justifies this cliff-face by saying that it wants to ensure that the owners of such properties pay their 'fair-share' of taxation. Given that the owners of expensive properties already pay higher SDLT and other property taxes, such as council tax – how are they not already paying a fair share?

It will also lead to some very unfair results. If you sell your property for £1,999,999 then there will be no tax, but if you sell for £1 more then you will pay tax on the whole thing. This will further distort the housing market – bearing in mind that the SDLT rules already have that effect.

It also means that you need to keep a very close eye on the current value of your property – because you may have purchased a property for, say, £1.5m but watch out if it starts growing in value. If it starts getting close to £2m then you would be wise to either sell or engineer a re-base (see below).

It seems that this government has an obsession with anyone who owns a property worth over £2m as this is also the entry level for the new annual charge. This charge will apply to those entities caught by the new 15% rate of SDLT. This is a relief for trustees and property developers alike. But, there is a nasty trap for partnerships – if any of the members of the partnership are companies or collective investment schemes then the annual charge will apply to the whole property – even if the company is entitled to only a tiny percentage of the property.

The most entertaining thing about the annual charge is that it will be self-assessed! This means that taxpayers will be expected to get their own valuations or – hilariously – give their own opinion as to the value of their property. It seems you will have to go through this process every five years. This will be a wonderful boost to our friends in the Chartered Surveying business!

Finally, I am worried about the reference in the condoc to bringing in CGT on the disposal of shares in a company, where more than 50% of the value is derived from UK property. This wasn't mentioned in the original Budget announcement and is a bit of a shock. The condoc doesn't say how this charge will be calculated or collected. The previous government tried the whole 'property rich' company taxation before and dropped it as it is such a minefield. What was a bad idea then is still a bad idea now, so what's changed?

To re-base or not to re-base...

The condoc makes it clear that there will be no re-basing measures in the legislation. It is also clear that even if you are not caught now – because your property is worth less than the magic £2m mark - then you could be caught later as your property grows in value. So, re-basing will be a recurring theme.

This means that existing trust and company structures will need to be either wound up or radically re-structured in order to - at the very least - re-base for existing gains. Of course, this will only be necessary now for properties which are currently worth over or close to £2m.

Let's look at the re-basing options. Clearly winding up the whole trust and company structure paying out the property to the settlor or another beneficiary will do the trick. Unfortunately, it will also trigger a Section 87 charge, which isn't so smart. You can't re-base within the structure by transferring the property to another company in the same offshore group either - as Section 14 TCGA stops this from working. You could try moving it from one offshore company to a sister company (i.e. not in the same group) but this would trigger SDLT at the enhanced rates.

This leaves you with the choice of moving the property up to the trust or to something else, such as a partnership.

The IHT problem

A non-LLP partnership, such as a Limited Partnership (LP) could well be the answer, in that the trust would be treated as owning an interest in a foreign property (its rights under the LP) rather than an interest in UK land. This potentially solves the IHT problem. Unfortunately, it's not as simple as that (it never is). The partnership needs to be trading in order to have presence for IHT purposes, so this means that for properties which are not held for trading purposes (like those used to provide living accommodation for beneficiaries) it's back to the drawing board.

The best we could come up with is the old double trust trick. In this scenario the property is transferred to a new trust, which somehow or other is encumbered by debt from the original trust (and no, that can't be by way of sale of the property as that would trigger SDLT). Assuming we can achieve this - and there are a few ways of doing it - then you have reduced the value of the relevant property by setting off the debt against the equity. Got all that?

But what about the CGT?

The more observant of you would have spotted that the use of the LP doesn't stop CGT arising on future gains as the ultimate owner for CGT purposes is the trust, which is a non-natural person. This could perhaps be ameliorated by creating a new class of partnership capital, belonging to a natural person, to which all new gains arise, whilst leaving the original value in the trust. But, to be honest, I haven't thought that one through properly and it could be a rubbish idea.

For properties in the double trust structure we can make the CGT go away if we have a beneficiary in occupation as his or her main residence - using the exemption in Section 225. The condoc states that the principal private residence relief should continue to be available in these circumstances.

What next?

The consultation period lasts until 23th August, following which the government promises it will review the feedback and make tweaks, if necessary, to the rules before publishing the draft legislation in the Autumn. This will lead to an undignified scrabble, between the Autumn and 5th April next year to make the necessary changes to literally thousands of offshore trusts and companies.

And as for new purchases - you need to be getting advice now. Believe it or not, there are still ways for new purchasers to structure things in a way which gives them privacy, limited liability, freedom from IHT and CGT but without triggering the 'super rate' of SDLT.

This month's household tip

Here are a couple of fun kitchen based tips for you this month. Two for the price of one! Apparently, a pinch of mustard added to percolating or filter coffee brings out the coffee flavour. I've heard similar advice regarding cardamon pods before – but the resulting brew was a weird cardamon/coffee combination with unfortunate debris at the bottom of the cup. If you don't fancy the mustard trick (and frankly I'm sceptical too) then try putting a potato in your bread bin as it will keep your bread fresher for longer. That really does work. Honest.

Best wishes

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