UK: D-Day For High Value UK Residential Property: 11 December 2012

Last Updated: 22 November 2012
Article by Terence Pay

11 December has been announced as the day when the long-awaited draft legislation will be published in connection with the proposed new tax regime for high value UK residential property. It is intended that this will become law as part of the 2013 Finance Act in April 2013.

Recap of Proposals:

Annual Stamp Duty Land Tax (SDLT) Charge

It is expected that an annual tax charge will be applied to companies and some other non-natural persons owning residential properties valued in excess of £2 million. The rates are proposed as:

Property Value

£2m - £5m

£5m - £10m

£10m – £20m

>£20m

Annual Charge

£15,000

£35,000

£70,000

£140,000

It is proposed that the annual charge will only apply to certain "non-natural" persons. This includes companies, other bodies corporate (it is not clear whether this will catch UK LLPs), collective investment schemes and partnerships including one or more such entities.

A property development business will be excluded from the charge, but only where it has been operating for two years.

For properties owned on that date, the charge will be based on the open market value at 1 April 2012; the acquisition value will be used if purchased later. This value will then be used for the purposes of the annual charge until 1 April 2017 – a valuation will only be required every five years.

Capital Gains Tax Charge on Sale

The Consultation Document confirmed the proposal for a capital gains tax charge on certain non-resident non-natural persons when they dispose of UK residential property from 1 April 2013. The charge is again restricted to the sale of residential property worth in excess of £2 million.

Two significant points to bear in mind in the original proposals:

  • No rate has been announced and this will not form part of the consultation process – it will instead be decided by the Chancellor in the March 2013 Budget.
  • The gain will be assessed on the entire period of ownership – i.e. there will be no rebasing of the asset for tax purposes at the time the legislation comes into effect (subject to final legislation – see below).

Draft Legislation: Do we expect any changes?

A significant number of responses to the Consultation have been received. It is generally felt that the proposals are a "sledgehammer to crack a nut" and many have raised objections to the inconsistencies and inequities contained in the draft. The "cliff edge" effect of the £2 million cut-off is also an area of concern. As a result it is expected there may be some concessions in the draft legislation, which may possibly include:

  • Some sort of provision to rebase as at 1 April 2013
  • Further relief for property investors
  • Relief in specific circumstances, such as for farmhouses, employees' accommodation etc.

Take Action Now

Although nothing should be implemented until the draft legislation is published, there will be a very limited window between 11 December and 31 March to undertake any restructuring which may be required to avoid punitive tax charges. Given that, in many cases, tax-efficient restructuring will involve the formal liquidation of a company in an offshore jurisdiction, it is vital that those affected are "ready to go" as soon as the draft is published. It is therefore recommended that an initial appraisal of existing structures is taken now, in anticipation of the proposed changes.

When considering suitable replacement structures, it will be important to ascertain the reason for an individual using a corporate or other holding vehicle. In our experience, the main considerations are:

  • Confidentiality/non-disclosure of ultimate beneficial owner
  • Asset protection and succession planning (particularly when combined with a trust)
  • Elimination of exposure to UK Inheritance tax
  • Elimination of exposure to UK Capital Gains Tax

Therefore, whilst it might appear at the outset that the natural replacement for a corporate structure is direct personal ownership, this will not be suitable for many clients who value above all else confidentiality. It appears at present that certain nominee and partnership structures may be the most suitable replacements but this will depend on the draft legislation.

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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