UK: ‘Enveloping’ High Value UK Residential Properties: Is There A Need To Act Now?

Last Updated: 28 June 2012
Article by Helen Ratcliffe

In the Budget, the Chancellor launched a three-pronged assault on high value UK residential properties that are 'enveloped' in a company or other 'non-natural person'. As a result, many UK individuals, non-UK domiciliaries, and offshore trustees have been anxiously awaiting the publication of fuller details.

A surprisingly slim Consultation Document appeared on 31 May 2012 entitled 'Ensuring the Fair Taxation of Residential Property Transactions' (no mention there of the fact that the annual tax will effectively operate as a kind of wealth tax). It was already known that the new annual charge and the new capital gains tax (CGT) charge would be coming into effect from next April, and so the immediate question is whether those who are affected are now in a position to consider whether action needs to be taken before then.


Perhaps the first important thing for those affected (or likely to be affected) by these new rules is to know how the picture will develop before they are finally in effect, as this will be a moving target in the coming months.

The present consultation lasts until August and we are promised draft legislation (again, for consultation) in the Autumn. However, we will not know the rates (the Consultation Document's use of the plural is interesting) of CGT to be applied to these properties until the next Budget - ie probably only a matter of two or three weeks before the rules come into effect. This will make it important to do structural planning in good time, allowing it to be tweaked, if necessary, at the last minute.

The first key valuation date for deciding whether a property that is already in an 'envelope structure' is worth over £2 million, and so within the new annual charge rules, will be 1 April 2012 - ie the first April that has just passed. This is also the date for deciding which band of the annual charge applies - there will be four bands, ranging from the lowest for properties worth £2-5 million, to the highest for properties worth £20 million plus. This 2012 date is helpful as it means that, rather than trying to plan based on an estimated figure as at April 2013, it allows planning in the coming months to be done using a known figure, so that the interaction of the various taxes can be considered more accurately: for it is the interaction of the various taxes that apply that will determine the cost of the new rules in any particular case, not a simple calculation of how much the combined CGT and annual charge would be.


In order to tackle the so-called enveloping of high value properties into companies and non-natural persons in order to 'avoid paying a fair share of tax', the Government has adopted a threefold approach:

  • with effect from 21 March 2012 a new 15% rate of stamp duty land tax (SDLT) applies on purchases of UK residential properties worth over £2 million by non-natural persons;
  • from 1 April 2013 an annual charge will apply to UK residential properties valued at over £2 million owned by non-natural persons; and
  • from 6 April 2013 the CGT regime will be extended to gains on the disposal of UK residential property, and shares or interests in such property, by non-natural persons who are non-UK resident.

The aim is to discourage enveloping of property and all three proposals will run in tandem. Any new purchases of properties worth more than £2 million by a non-natural person will suffer a 15% SDLT charge on the purchase. The annual charge based on value will then be payable going forward and, if the non-natural person is non-UK resident, disposals of the property will now be subject to CGT. Non-natural persons who acquired relevant property before Budget Day will be subject to the annual charge and, if non-UK resident, CGT on disposal.

Legislation to effect the higher rate 15% SDLT charge is included in the Finance Bill 2012 and from that we know that 'non-natural person' includes companies, collective investment schemes and partnerships in which a non-natural person is a partner. However the 15% charge will not apply to the purchase of a property by a trust even though one or more of the trustees is a company. In the Consultation Document it is suggested that same test for non-natural person should apply for the purposes of the annual charge. The proposal is that the extension of the CGT regime will, however, apply to offshore trustees, corporate or not (see below).


An annual charge will come into effect on 1 April 2013 and will generally be payable at the start of the period of account, ie by 15 April of each year. It is proposed that the charge will operate on a pro rata basis so that if the property is sold during the year a repayment of part of the charge can be claimed.

A special tax return will be required each year for each relevant dwelling within the charge owned by the non-natural person. The return must include information on the property: its address, Land Registry title, details of the 'beneficial owners' of the property and their address if different from the property address. We do not yet know whether this will require simply details of, say, the company which owns the property or whether HMRC will need to be informed of the ultimate beneficial owners, for example, details of the shareholders or, if the company is held by a trust, details of that trust.

The levels of the annual charge will be set at £15,000 pa for properties valued at between £2-5 million; £35,000 for properties valued at between £5-10 million; £70,000 for properties valued at between £10-20 million; rising to £140,000 for properties worth more than £20 million. The annual charge will be indexed to the Consumer Price Index (CPI) and increased in April each year based on the CPI of the previous September. This will commence from the second year of charge (namely 1 April 2014).

Introducing an annual charge on capital values means that the UK now has its first form of wealth tax (a form of tax found in many European jurisdictions including France and Spain).

Valuation issues will be key for properties already in such structures, particularly for those on the cusp of the different band levels. The valuation required for the first year of the charge will be the market value of the residential property on 1 April 2012 for properties already in an envelope structure, or the acquisition value if acquired after that date. Properties retained in these structures will have to be revalued every five years, so a further valuation will not be required until 1 April 2017. Owners of properties which were bought for less than £2 million will need to consider the current value of the property and if the value is approaching the £2 million mark may need to obtain a professional valuation to protect themselves. A reminder should also be set to ensure that the position is reviewed in April 2017 if the property is still owned at that time.


The proposal is for CGT to be extended to certain non-natural persons who are not resident in the UK for tax purposes. Non-natural persons who are resident in the UK are already subject to tax on gains realised on the sale of residential property, either CGT or corporation tax on capital gains.


The Consultation Document notes that to support the annual charge the categories of non-natural person to whom the CGT regime will be extended will 'necessarily have to include those categories that are subject to the annual charge' and asks what further categories might be included. From this one might infer that the starting point would be that offshore trusts, including those with corporate trustees, would be excluded. However, it is clear that the Government is expecting to extend the new CGT charge to apply to offshore trusts which hold relevant residential property, and indeed the opportunities for avoidance if trusts were not included under this head of charge are obvious.

Current CGT avoidance legislation already ensures that gains accruing to certain non-resident trusts can effectively be charged to CGT, for example by virtue of the rules under which settlors or beneficiaries of non-resident trusts can be charged to tax on gains accruing to the trustees (sections 86 and 87 Taxation of Chargeable Gains Act 1992). The Consultation Document acknowledges that the interaction between the new rules and provisions such as these will have to be considered carefully to avoid 'unnecessary complexity' and 'ensure a sensible prioritisation of charging provisions'.

Section 87 was heavily revised as recently as 2008, and it will be interesting to see how the more detailed proposals will accommodate the Government's pre-existing commitment that there will be no further substantive changes to the taxation of non-UK resident non-domiciliaries (non-doms) during the remainder of this Parliament.


It is envisaged that the CGT charge will only apply to disposals of residential property where the amount of the consideration for the disposal exceeds £2 million. There is to be no 'grandfathering' of (ie protection for) latent gains that have accrued but not been realised before the extension of the CGT regime. Although the property market as a whole has seen prices fall or remain static in recent years, those at the higher end of the market have seen large increases and substantial gains could have been built up where properties have been held for a longer period of time.

As noted above, the rates of CGT will be confirmed by the Chancellor at Budget 2013: they are not a subject for consultation. The main rate of CGT for individuals and trusts is currently 28%. For the year ending 31 March 2014 the main rate of corporation tax for companies is to be 23% and for smaller companies (those with a profit of less than £300,000) it is due to be 20%. The Chancellor has a range of rates to choose from. One approach might be to have a flat rate of CGT applied to all non-natural entities caught by the rules; an alternative would be to use the CGT rate which would have applied to that entity if it were UK resident. How all this will interrelate with rebasing for offshore trusts, latent gains, and the supplementary charge that applies if their gains are not paid out in the year they are realised receives only the most sketchy treatment in the Consultation Document.


The definition of residential property for these purposes will follow the meaning of 'dwelling' used for the 15% SDLT rate and the new annual charge. The CGT regime will apply to disposals of residential property in enveloped structures irrespective of the use to which it is put, for example it will apply to commercially let residential property. A CGT charge will also arise on gains realised on the disposal of assets which represent, directly or indirectly, relevant UK residential property. This will include disposals of shares, interests or securities in a property owning company where more than 50% of the value of the asset is derived from UK residential property. Losses arising on the disposal of relevant UK residential property will only be available to offset against gains on disposals of relevant UK residential property in the same or future years.


This outline of the issues will have amply demonstrated that those who are affected should not hasten to make actual changes at this stage, but that it is not too early for those who are affected by the new rules to begin to identify how they wish to respond to this new legislation.

The most important first step will be to think back to the reasons why the property was put into a company or a non-natural person in the first place. To what extent are those reasons still valid? Will the disadvantages of the charges outweigh them, or do those reasons still remain compelling? If they do, can the key objectives be achieved in a different way that will be less harshly treated by the new rules?

There is a simplistic view, which the Government seems to share, that properties were put into companies 'to save SDLT'. Actually it saved no SDLT on the purchase itself, only potentially saving SDLT on an onward sale. The reasons for using a structure of this sort were usually more complex and more worthwhile. They would generally include a mix of:

  • inheritance tax protection;
  • privacy;
  • avoiding the need for a UK probate; and
  • reasons relating to another jurisdiction with which the individual or family was connected.

So in deciding what to do now it will be necessary to compare not only costs, but also less tangible benefits such as privacy. Each case will be different and will need to be looked at in the wider family or other context - for example, is this the main family home, or a flat in London only used by a non-dom from time to time? If the UK is not the main base, how long do the family expect to stay in the UK?

The instinctive reaction of many may be to wonder whether they should 'de-envelope' - in other words to take the property into personal ownership. That is certainly what the Government wants people to do. For some it may well be the right course. To get the best result it will, however, be important to identify the tax and other costs of the process of de-enveloping, and then to compare them with the tangible and intangible cost and benefits of either maintaining or altering the structure.

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.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions