UK: High Value Residential Property In The UK - January 2013

Last Updated: 12 February 2013
Article by Smith & Williamson

Introduction

During the year 2012, the UK Government has announced a number of changes that impact on the purchase and ownership of UK residential properties. Some of these measures were detailed in the Budget on 21 March and are already in force. Details of further measures have been under consultation. The results of that consultation and some draft legislation were published on 11 December 2012. Further draft legislation was published on 31 January 2013. The measures will take effect from April 2013.

The changes affect the purchasing and ownership of UK residential property worth over £2 million held by 'non-natural persons' in three respects:

  • an annual residential property tax;
  • an extension to the scope of capital gains tax (CGT); and
  • stamp duty land tax (SDLT) at 15%.

Annual residential property tax

An annual residential property tax (ARPT) is to apply on UK residential property worth over £2 million held by 'non-natural persons'.

The draft legislation confirms that the annual charge will apply to the same categories of non-natural person as the 15% rate of SDLT, being:

  • companies;
  • collective investment schemes; and
  • partnerships that include a company.

The Government has announced a number of significant reliefs for genuine businesses carrying out genuine commercial activity. The following dwellings will be relieved from the tax:

  • dwellings held for the purpose of the property development trade of the company;
  • dwellings held for the purposes of letting to third parties for rent on a commercial basis;
  • dwellings held for the purposes of a trade of buying and selling property;
  • properties open to the public with access to the interior for at least 28 days per year on a commercial basis, as a venue, location or to provide accommodation or other services;
  • dwellings held to provide employee accommodation for the company's commercial purposes, where the employee has less than a 5% interest in the company;
  • dwellings owned by charities and held for charitable purposes;
  • farmhouses where a working farmer occupies a farmhouse connected to the farm land for the purposes of farming the land;
  • certain other diplomatic, publicly owned properties or properties conditionally exempt from inheritance tax.

The first annual charge will arise on UK residential properties owned at 1 April 2013 or acquired, built or converted from a non-residential property after that date and will be payable in advance for the period 1 April 2013 to 31 March 2014.

The amount of the annual charge depends on the market value of the property. If the property was owned on 1 April 2012 the value at that date will be used to calculate the charge at 1 April 2013, for properties acquired after 1 April 2012 the value at the date of acquisition will be used. Properties will have to be revalued every 5 years so for properties held at 1 April 2012 the next valuation date will be 1 April 2017 which will form the basis of the April 2018 annual charge.

The annual charge will be self-assessed so those persons liable to the charge will be responsible for obtaining the market value of their property at the respective dates. The due date for returns and payment of tax will normally be by 30 April of each year. However, for the first year the due date for the return will be 1 October 2013 with payment made by 31 October 2013. There are different time limits for the first return when dwellings are first acquired after 1 April 2013.

A non-natural person must make a nil-charge return to claim relief from the ARPT.

The bands and annual charge for 2013/14 are as follows:

Property Value

Annual Charge April 2013/14

£2m - £5m

£5m - £10m

£10m - £20m

Over £20m

£15,000

£35,000

£70,000

£140,000

The annual charge will be indexed to the Consumer Price Index (CPI) and updated each year. There are no proposals to uplift the rate bands with the CPI.

If the property is not held for the whole of the charge period the charge will apply pro- rata. This will also be the case for properties which move into or out of the Annual Charge (e.g. due to conversion from commercial property to residential property, or vice versa).

CGT charge on disposals of certain UK residential property

Draft legislation covering the application of CGT to ARPT-related gains was published on 31 January 2013. The scope of CGT is to be extended to include a charge on disposals or part disposals of UK residential property over £2 million by UK resident and non-resident 'non-natural persons'.

Under existing legislation CGT is only payable by UK residents. Anti-avoidance legislation treats gains on disposals by non-resident companies and trusts as accruing to UK resident individuals in certain circumstances.

It had been announced in the 2012 Budget that CGT would now be levied on disposals of UK residential property by non-resident 'non-natural persons' from 6 April 2013 where the value of the consideration for the disposal exceeded £2 million. The Government has now confirmed that the same rules will apply to disposals by UK resident 'non-natural' persons. Hitherto UK resident companies have paid corporation tax on capital gains but from 6 April 2013 CGT will apply to ARPT-related gains.

The category of non-natural person for CGT is the same as that for the ARPT and the 15% rate and will principally impact companies and collective investment schemes. The new rules do not apply to property within trusts, but do apply to property within a company in trust ownership. The same reliefs will apply for genuine commercial activity.

The gain will be calculated following normal CGT rules. The computation of gains will take into account those periods where the non-natural person qualifies for the reliefs against the ARPT as detailed above.

The rate of CGT will be 28%, with a tapering relief for gains where the property is worth just over £2 million. The tax charge will only apply to disposals after 5 April 2013 and is calculated using the 6 April 2013 market value as the base cost.

For non-resident non-natural persons the anti-avoidance legislation continues to apply to the pre-6 April 2013 element of the actual gain and to that part of the post-5 April 2013 gain which is exempt from an ARPT-related charge because of a relief. Likewise, corporation tax will apply to UK-resident companies on the part of an overall gain not subject to CGT under the new rules.

If losses arise on the sale of properties within the charge, these will only be available to set against gains on disposals of UK residential property in the same or future years. The amount of allowable loss is restricted where the proceeds are less than £2 million and costs exceed the threshold.

It will be possible to elect for the ARPT-related chargeable gain to be computed using the original base cost rather than 6 April 2013 market value. Making this irrevocable election will have merit if the original base cost was higher than the market value, or where much of the pre-6 April 2013 element of the gain would be exempt to a charge under ARPT rules because of reliefs, or where there are ARPT-related losses from other transactions.

Stamp duty land tax (SDLT)

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

A 7% rate of SDLT applies to residential property transactions valued at more than £2 million with an effective date (normally completion) on or after 22 March 2012.

The standard rates of SDLT payable on land purchases are now as follows:

Rate

Residential

Non-Residential

0%

1%

3%

4%

5%

7%

Up to £125,000

£125,001 to £250,000

3£250,001 to £500,000

£500,001 to £1,000,000

£1,000,001 to £2,000,000

Over £2,000,000

Up to £150,000

£150,001 to £250,000

£250,001 to £500,000

£500,001 to £1,000,000

Over £1,000,000

15% rate of SDLT on consideration of more than £2 million where UK residential property acquired by 'non-natural persons'

Where the acquisition of a UK residential property in excess of £2 million is by a 'non- natural person' the rate of SDLT payable on the purchase will be 15% rather than the 7% rate outlined above. This affects all purchases entered into on or after 22 March 2012.

'Non-natural persons' for this purpose has the same definition as for the ARPT.

There are certain companies and partnerships excluded from the 15% charge as follows:

  • a company does not include a company acting in its capacity as a trustee of the settlement;
  • a bona fide property development business is excluded provided that:
    • the property is acquired in the course of a bona fide property development business; and
    • the business has been operating for a minimum of two years; and
    • the property was purchased with the intention of re-development and re-sale (note that development and letting is not excluded).
  • charities are excluded from the charge.

These exclusions will be in point until Royal Assent of the Finance Bill 2013 (June / July).

The draft legislation and summary of proposals published on 11 December 2012 include a number of significant modifications to the scope of the 15% rate. These changes are expected to apply from the date of Royal Assent.

It is proposed that there will be a series of reliefs from the 15% SDLT rate (so that SDLT is instead charged at 7%) for genuine property businesses purchasing residential property for over £2million. It is intended that where possible, these reliefs will operate in tandem with the reliefs detailed above in relation to the ARPT. The result being that generally a transaction to which the 15% rate of SDLT is charged is also liable to the ARPT.

The most significant new reliefs will apply to persons running property rental and property trading businesses. Furthermore, the two year trading condition referred to above for property developers is also to be removed.

Relief may be withdrawn if within three years of acquisition, the dwelling ceases to be used for a relievable purpose or the dwelling is occupied by any person connected with the owner (except for farmhouses and houses exploited for public access).

It is disappointing that the exemptions will not come into force for the purposes of the 15% SDLT charge until Royal Assent, usually sometime in June or July. This will, undoubtedly, lead to some paralysis in the market as purchasers wait until the exemptions take effect.

Existing Structures - What should be done now

There will be no generic right answer for all types of structure; each one will need to be considered taking account of the individual facts of the situation.

In each case it will be necessary to undertake cost analysis of maintaining or dismantling an existing structure, as well as the tax consequences of each alternative.

In some circumstances it would be preferable to keep existing structures and pay the new taxes so as to keep the current UK inheritance tax protection. Property owners may also have concerns about property tax charges in other jurisdictions.

Others will need to consider the SDLT and CGT consequences of dismantling a structure and their future IHT exposure. The position will depend to a large degree on the residence and domicile status of the individual concerned.

The new General Anti-Abuse Rule (GAAR) will become effective from the date that the Finance Bill 2013 receives Royal Assent (probably late July 2013) and that will be another factor to be borne in mind.

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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