UK: UK Residential Properties With A Value Of More Than £2m

Last Updated: 9 April 2012
Article by Smith & Williamson


Measures announced on 21 March 2012 will have a significant influence on the purchase and sale consideration for high value UK residential property. Prior to these announcements certain purchasers of these types of properties would have considered purchasing the property using a special purpose vehicle, often an offshore company. The reasons would have included:

  • IHT mitigation by ensuring the property is held outside the UK and so excluded from a non-UK domiciled person's UK estate subject to IHT;
  • SDLT mitigation – the transfer of shares in an offshore company might not attract any stamp duty in certain circumstances, whereas the transfer of the property itself could have attracted an SDLT rate of 5%;
  • a desire to keep the property outside the charge to UK CGT (although a property used or nominated as a UK individual's only main residence would not have been subject to CGT);
  • protecting the beneficial owner's identity.

Tax changes announced on 21 March 2012

There had been much press speculation that the use of offshore companies and particular tax avoidance arrangements to avoid high levels of SDLT on expensive residential property would be targeted in the 2012 Budget. There had also been some discussion on rebalancing the tax system to raise a greater proportion of taxes from high value properties. The changes announced on 21 March relating to residential properties valued at £2m or more are set out below:

7% rate of SDLT on consideration of more than £2m

A 7% rate of SDLT will apply to residential property transactions with an effective date (normally completion) on or after 22 March 2012, though there are transitional measures in respect of contracts made before 22 March 2012 but completed on or after that time (where the 5% rate would apply). Essentially contracts entered into before 22 March 2012 can continue to apply the old rates, unless:

  • there is a variation of the contract; or
  • an exercise of any option, right of pre-emption or similar right on or after 22 March 2012; or
  • there is an assignment, subsale or other transaction relating to the subject matter of the transaction so that a person other than the purchaser under the contract becomes entitled to call for conveyance.

This measure will affect all purchasers of high value property, except for certain company, partnership or collective investment scheme purchasers (see below).

15% rate (higher rate) of SDLT on consideration of more than £2m

A 15% rate of SDLT will apply to the acquisition of residential property where the effective date of transaction is on or after 21 March 2012 and it is acquired:

  • by a company; or
  • by or on behalf of a partnership of which a company is a member; or
  • for the purpose of a collective investment scheme (as defined by part 17 FSMA2000 s235).

Note if two or more persons purchase the property jointly, the charge will apply if one or more persons meet these conditions. Non-natural persons for this purpose do not include trusts (in contrast to the proposed CGT charge, see below).

In the case of a bare trustee, the provisions in FA03 Sch16 para 3 apply but with the exclusion of subsections (2) and (3) of that paragraph, so that the acts of the trustee are taken to be the acts of the person or persons for whom he is trustee, whether the interest is a freehold or not.

However the previous 5% rate will apply to the following:

  • contracts entered into and substantially performed before 21 March 2012;
  • transfers effected in pursuance of a contract entered into before 21 March 2012 and for which the following conditions are met:

    • it is not varied or assigned on or after 21 March 2012; and
    • no option, right of pre-emption or similar right is exercised on or after 21 March 2012; and
    • no assignment, subsale or other transaction takes place so that a person other than the purchaser under the contract becomes entitled to call for conveyance.

    However for certain partnership transactions following a land transfer, it is not necessary to meet these conditions as long as the date of substantial performance of the land transfer is before 21 March 2012.

There are certain companies and partnerships that are excluded from the charge as follows:

  • References to a company do not include a company acting in its capacity as a trustee of a settlement;
  • a property development company if the property is acquired in the course of a bona fide property development business and for the sole purpose of developing and reselling the land and the company has carried on that business for at least two years before the effective date of the transaction;
  • a partnership of which a company is a member if the property is acquired in the course of a bona fide property development business and for the sole purpose of developing and reselling the land and the partnership has carried on that business for at least two years before the effective date of the transaction. This exclusion also applies to certain other partnership transactions provided the same conditions are met in relation to the partnership, and the partnership is continuing to carry on its business; and
  • in relation to partnership transactions to which FA03 Sch15 part 3 apply (transfers of chargeable interests to or from a partnership, transfers of an interest in a property investment partnership) the 15% charge does not apply unless the chargeable consideration for the transaction is more than £2m.

A property development business is one consisting of or including buying, and redeveloping for resale, residential property. A property development company will be treated as having carried on a property development business at any time when it was carried on by a company which is a member of the same group as the company. Companies are members of the same group if they are in the same group for SDLT group relief purposes (FA03 Sch 7). This means that one company must be the 75% subsidiary of another, or both are 75% subsidiaries of a third company, with the 75% interest being assessed according to all of the following factors being in place:

  • beneficial ownership of at least 75% of the ordinary share capital;
  • beneficial entitlement to at least 75% of the profit available for distribution to equity holders; and
  • entitlement to 75% of any assets available for distribution to equity holders on a winding up.

However this will not cater for the situation where two developers collaborate in a joint venture using a newly established company which is not a member of either developer's group.

The 15% rate applies to a 'higher threshold interest' which is so much of the chargeable interest that consists of a single dwelling to which chargeable consideration of more than £2m is attributable. If the subject matter of the transaction includes both a higher threshold interest and another chargeable interest (such as a non-residential interest, or a residential interest below the higher threshold), then the transaction is divided into two transactions, one consisting of the higher threshold interest, and the other consisting of the remainder.

Normally bare land for residential development would not be classified as residential property; however there may be instances where such land meets the definition of a dwelling. These are where there is:

  • land which includes a dwelling which is in the process of being constructed, or a building which is in the process of being adapted for use as a dwelling;
  • land that is, or is to be, occupied or enjoyed with a dwelling as a garden or grounds (including any building or structure on such land) is taken to be part of that dwelling. HMRC take the view that a dwelling's garden or grounds includes land to the same extent as would be regarded as land associated with a dwelling for principal private residence exemption for CGT; or
  • land that subsists, or is to subsist, for the benefit of a dwelling is taken to be part of the dwelling.

Where there are six or more separate dwellings subject to a single transaction for the transfer of a major interest or grant of a lease, then the dwellings are regarded as non-residential. A building used as a hotel, inn or similar establishment is not used as a dwelling. This is not an exhaustive description of what is and is not residential property for SDLT purposes. One difference between the definition of dwelling for the purposes of the higher rate and other SDLT rates is that categories of building identified in FA03 s116(2) and s116(3) are not dwellings for the purpose of the higher rate. This will, for example, exclude from the higher rate charge residential accommodation for students that is not a hall of residence for students in further or higher education, whereas they would be dwellings for the purpose of other SDLT charges.

It should be noted that for the purpose of the higher rate an interest in a dwelling includes a situation where:

  • substantial performance of a contract constitutes the effective date of that transaction;
  • the main subject matter of the transaction consists of or includes an interest in a building or a part of a building, or a part of a building, that is to be constructed or adapted under the contract for use as a single dwelling; and
  • construction or adaptation of the building or part of the building has not begun by the time the contract is substantially performed.

This would appear to potentially catch land with planning permission for, and provision in the contract for the construction of, a residential dwelling, despite the fact that no construction has taken place. It is conditional on the effective date being substantial performance, which is where the purchaser takes possession of the whole or substantially the whole of the subject matter of the contract, or a substantial amount of consideration is paid or provided.

With regard to the comment on six or more dwellings sold together being non-residential for SDLT purposes, if there is a single dwelling with consideration attributable of £2m or more, then that will be treated separately as a dwelling to which the higher rate applies. In addition multiple dwellings relief will apply, but excluding any dwelling subject to the higher rate.

The higher rate measure will affect both UK and non-UK purchasers of high value residential property. It will almost certainly ensure that it will not be tax effective for a REIT to consider a future purchase of high value residential property. This is a one-off charge, however, and once within the structure the SDLT and stamp duty implications will depend on the nature of the non-natural person used and the transaction undertaken.

Potential annual charge

Included within the announcement of the introduction of the 15% SDLT rate was a commitment to consult on the introduction of an annual charge on residential properties valued at over £2m owned by certain non-natural persons, with the intention of introducing legislation coming into effect in April 2013. Further details are awaited, but this appears to be an introduction of the 'mansion tax' proposals (it is not known whether this will apply to both UK and non-UK resident non-natural persons, or only the latter).

The Budget policy costings include the table below indicating the annual charge levels.

Property value

£2m - £5m

£5m - £10m

£10m - £20m

Greater than £20m

Annual charge





If the definition of 'non-natural persons' for this purpose follows the definition for the 15% SDLT charge, this will not include trusts (in contrast to the proposed CGT charge - see below).

CGT regime for non-resident non-natural persons in respect of residential property

The Government announced it would extend the CGT regime to gains on disposals of UK residential property by non-resident non-natural persons and shares or interests in such property. This measure will take effect in April 2013 following consultation (though no date for the consultation has been set).

We await further details, at this stage it is unclear whether the charge would apply to the disposal of the UK residential property only (whether in whole or in part), or whether it would be extended to shares or units in a non-resident non-natural person most of whose assets consist of UK residential property and if so how this would be administered. The majority of the UK's tax treaties would permit the UK to tax gains arising on immovable property.

It is also understood that non-resident non-natural persons will include non-resident trusts.

SDLT sub-sale rules

Legislation taking effect for grants or assignments, on or after 21 March 2012, of options in connection with sub-sales will mean that subsale relief is no longer available for these types of transaction. This closes an arrangement widely marketed as eliminating the SDLT charge on a land transaction. In addition there will be consultation on the sub-sale rules, with any further revisions to be incorporated in Finance Bill 2013.

It has been apparent for some time now that many high-value property transactions were being structured so as to avoid a charge to SDLT. Many of the planning structures that were used took advantage of the sub-sale provisions in s45 Finance Act 2003.

Sub-sale relief is designed to prevent a double charge to SDLT where a property is acquired and immediately sold on (a sub-sale). Tax is only charged once on the end purchaser. The planning structures being used relied on combining sub-sale relief with something else in order to make the charge disappear altogether. The use of an option was the latest manifestation of this type of planning and this has now been specifically stopped.

The problem, however, lies with the drafting of s45, as evidenced by the fact that most planning has exploited these rules. It is, therefore, not surprising that HMRC is to consult on the sub-sale rules. Nevertheless, sub-sale relief fulfils a very useful commercial function and it is to be hoped that it will not be jettisoned altogether.

Further SDLT anti-avoidance

It was announced on 21 March 2012 that consultation would proceed in summer 2012 on a general anti-abuse rule, with a view to bringing forward legislation in Finance Bill 2013. This was based on the report by Graham Aaronson QC which suggested a possible general anti-abuse rule to cover initially income tax, capital gains tax, corporation tax, petroleum revenue tax and national insurance contributions, with SDLT to be covered at a later date. The 21 March 2012 announcement makes clear that SDLT will be included within its scope from inception.

The Chancellor also commented with respect to avoidance for all the above measures as follows:

"Let me make this absolutely clear to people. If you buy a property in Britain that is used for residential purposes, then we will expect stamp duty to be paid. That is the clear intention of Parliament. I will not hesitate to move swiftly, without notice and retrospectively if inappropriate ways around these new rules are found. People have been warned."

Should retrospection be effected it appears from the budget documents that this will be with effect from 21 March 2012.

Tax issues to consider in relation to these changes

The following tax issues should be considered in the circumstances outlined.

If a 'high value' residential property is already owned by a company or other non-natural person:

  • The potential impact of the annual charge from April 2013 onwards.
  • If the company or non-natural person is non-UK resident, the potential CGT implications of any gain on disposal of the property or the shares or units in the non-natural person.
  • The IHT and other tax implications of unwinding any existing structure.
  • Review the consultation documents when issued later this year.
  • Review existing structure before taking up residence in the UK.

If consideration is being given to the purchase of a high value residential property:

  • Whether to pay a 15% one-off SDLT charge to get the property inside a special purpose vehicle to limit any SDLT costs on disposal, or whether to hold the property personally and pay 7% initially. If SDLT on disposal of a special purpose vehicle will be say 0.5%, then this may be a real consideration compared to paying 7% on acquisition now with the next purchaser having to pay 7% or 15% on acquisition from the vendor. However potential annual charges and CGT for certain SPVs may take away the value of enveloping the property in this way.
  • If a purchase by a non-UK resident non-natural person is contemplated, consider the potential impact of CGT on any future gain.
  • The potential impact of the future annual charge on such residential properties held in this way.
  • The IHT implications of the proposed method of purchase.

If consideration is being given to the sale of a high value residential property:

  • The most suitable method of sale to minimise SDLT costs for potential purchasers.

The legislation to be released on 29 March 2012 should be examined carefully.

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.

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