UK: Taxation Of High Value Residential Real Estate

The consultation paper 'Ensuring the fair taxation of residential property transactions' has been published by HM Treasury. This paper sets out the detail of the Government's proposed tax charges on high value residential property.


These new taxes have been designed to counter perceived abuse of the tax system arising from the holding of residential property by non natural persons. The new taxes will apply at three stages: (i) on a purchase; (ii) during the period of ownership; and (iii) on a sale. These taxes are currently restricted to purchases of properties for more than £2m. The policy objective of these new taxes is not simply to raise additional tax revenues from owners of high value properties, but to act as a deterrent to the use of holding structures (or 'envelopes') both for new purchases and existing properties.

SDLT on purchase

Personal ownership

From 22 March 2012 the purchase of residential property for more than £2m has been subject to SDLT at a rate of 7%, increased from 5%. This 7% rate is simply a new higher band of SDLT that is subject to the same rules and exemptions as the existing 5% rate. This includes, for example, treating the purchase of six or more properties in a single transaction as not being residential.

Ownership by 'non-natural persons'

From 21 March 2012, a new SDLT rate of 15% applies on the purchase of a single dwelling (or an interest in a single dwelling) for more than £2m by a non natural person. A non-natural person is defined as including; a company, a partnership whose partners include a company, or a collective investment scheme and applies to both UK and non-UK entities. This charge is distinct from the existing SDLT regime. Before the changes, the purchase of a block of flats in which all of the individual flats other than the penthouse were valued at less than £2m, would have attracted SDLT at a rate of 4%. This is because the purchase of six or more properties is deemed to be non residential. This deeming provision will not apply to a purchase by a non natural person. The purchase of the flats will still be considered residential for SDLT purposes and there will be a 15% charge to SDLT on the penthouse as it is valued at more than £2m. The purchase of a £3m property will simply be subject to a charge to SDLT at a rate of 15%.

Exclusions from the 15% charge

As the 15% charge applies to both UK and non-UK non natural persons, the 15% charge will catch activities that would not ordinarily be considered abusive. There has been some attempt to mitigate the charge for certain classes of purchasers by introducing an exclusion for (i) property development companies that have been trading for 2 years; and (ii) companies acting as a trustee (individual trustees will not be caught as they are not non natural persons). However, there is no exemption for residential letting businesses.

Position of nominees

Bare trustees and nominee ownership will be disregarded for the purposes of the new charge, which will depend on beneficial ownership. This will allow for the continued use of nominee companies to protect the privacy of property owners.

The annual charge

An annual charge will apply from 1 April 2013 to property held by non natural persons. This will affect new and existing owners alike. It will also apply to any owner of an interest in a residential dwelling and so freeholders and leaseholders will be separately assessed. Retaining the cliff edge nature of SDLT generally, the charge is applied in steps depending on property values.

Property Value

£2m to £5m

£5m to £10m

£10m to £20m

Over £20m

Annual Charge





These annual charges will increase each year in line with the Consumer Price Index, but the thresholds will not. Property values are to be self assessed by owners, but are subject to review by HMRC. For the first charge in 2013, the market value on 1 April 2012 or later purchase date will be relevant. Thereafter properties are valued as at the date of purchase, the granting of a subordinate interest (e.g. a lease) or every five years (so on 1 April 2017 for properties already owned). There is no requirement to instruct an independent valuer, but taxpayers who do not may be exposed to penalties if their valuation is challenged.

Capital gains tax on sale

The final measure is to extend capital gains tax from 6 April 2013 to non-UK resident, non natural persons disposing of assets 'that represent directly or indirectly relevant UK residential property'. This charge is extended beyond the scope of the 15% and annual SDLT charges in two ways. Firstly, it is intended to apply to a broader class of non natural persons including all non UK trustees and personal representatives (including individuals). However, where a beneficiary occupies a property as his principal private residence, relief from capital gains tax should be available. Secondly, as well as a direct disposal of a property, a charge to capital gains tax will also apply to the sale of shares of a company where more than 50% of the value is derived from UK residential property. The rate of tax has not been announced but it is assumed that this will be between 20% and 28%. This will be payable on the gain since acquisition and so there will be no automatic rebasing to current values.


These rules represent a dramatic departure from the existing tax regime for non-resident owners of UK residential property, who will need to closely examine their motivations to identify the options available. Each owner will have different considerations to bear in mind that will determine the appropriate course of action.

It is also worth noting that the General Anti-Abuse Rule, which will be implemented from April 2013, will apply to the new SDLT and capital gains tax charges and therefore structures designed to exploit perceived loopholes that fall outside the spirit, if not the letter, of this legislation will remain extremely vulnerable to attack by HMRC. So, what should existing property owners and new purchasers do?

Potential purchasers

For many the 15% charge to SDLT on acquisition and ongoing annual charges is likely to make a purchase through a non-natural person unpalatable. Where the core motivation is the avoidance of a liability to inheritance tax, individuals should consider other forms of mitigation, such as borrowing or insurance. Where outright ownership is preferred, a nominee company can be used to retain a beneficial owners' confidentiality. Discretionary trusts, which fall outside the 15% charge, the annual charge and possibly the capital gains tax charge may be attractive for others. Inheritance tax is imposed at predictable ten year intervals, rather than on a death. Planning opportunities may exist to reduce or eliminate these charges, subject to the application of the GAAR mentioned above and the rules relating to the Disclosure of Tax Avoidance Schemes.

Existing property owners

Existing property owners will need to consider what steps they should take in advance of 1 April 2013. The first step should be to determine the implications of retaining existing holding structures. Where property is owned through a company, it is worth noting that there remains no proposal for an SDLT charge to apply on the sale of shares in such companies. A purchaser may therefore pay a premium to buy the shares (avoiding the 15% SDLT charge). However, this will need to be balanced against the annual charges and exposure to capital gains tax on a disposal, both of which will apply from April 2013. For those who wish to retain their company structure, rebasing the purchase price of the property to current market value, so as to reduce the future capital gains tax charge is advisable. However, where the beneficial owners are UK resident or the shares are owned by a trust, this may itself give rise to an immediate charge to tax and so care will need to be taken. Similarly those who wish to collapse an existing holding structure will need to consider whether this will result in any other tax charges, particularly if the property has been occupied on a rent free basis by a UK resident beneficiary. For those who can exit an existing structure, they will face some of the same considerations as potential purchasers in deciding what should replace it.


Our advice is to proceed with caution. All affected property owners should review their structure to determine what action is possible and the likely implications. However, until draft legislation is available in the Autumn, they should avoid rushing into restructuring, which may have worse consequences. 

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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