The commentaries below are written in general terms. Details can also be found in our downloadable Budget Report brochure, which will be available shortly. You are strongly recommended to seek specific advice before taking any action based on the information given, both in the commentaries and in the publication.
Taxation of high-value residential property held by non-natural persons
HMRC has consulted extensively and released draft legislation on the new rules which will apply where a UK residential property valued at over £2 million is held by a non-natural person. These rules cover SDLT, ATED (annual tax on enveloped dwellings) and CGT.
Apart from a change in the acronym from ARPT (annual residential property tax) to ATED, no substantive changes have been announced to the draft legislation published in January 2013.
Comment
These new rules provide a serious disincentive to holding expensive UK residential property through a company but have been well trailed and will be enacted as expected.
Reliefs from the 15% rate of SDLT
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 that would otherwise apply. This affected all such purchases entered into on or after 22 March 2012, and there were only limited exceptions to the 15% rate. As a result of further consultations the list of exceptions to the charge has been increased, but these exceptions will only apply to transactions entered into on or after the date of Royal Assent of Finance Bill 2013.
The existing exceptions are:
- a company acting in its capacity as a trustee of the settlement;
- a bona fide property development business 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.
The proposed further exceptions include:
- All property development, investment and trading businesses;
- Residential properties open to the public (on a commercial basis) for a period of at least 28 days per year;
- Residential property held for occupation by an employee;
- Residential properties owned by charities and held for charitable purposes;
- Working farmhouses;
- Diplomatic properties;
- Some other publically-owned residential property.
The reliefs will not apply where the property is occupied by a non-qualifying individual, and non-qualifying use of the property can preclude access to the relief both before and after the non-qualifying occupation.
Comment
Although the extension of the reliefs is welcome, it had been hoped that access to the new reliefs would be available from April 2013, so it is disappointing to see they will only apply for transactions occurring on or after the date of Royal Assent of Finance Bill 2013.
Reform of the transfer of rights rules
As a result of perceived abuse of the SDLT 'transfer of rights' or subsale provisions in SDLT avoidance schemes, the Government has undertaken a re-write of those provisions.
In a typical transfer of rights, the original vendor enters into an agreement with the 'transferor' for the sale and purchase of UK land which is to be completed by a conveyance. The transferor then enters into another transaction with another person (the transferee) as a result of which the transferee can call for a conveyance of that land. Where there is a transfer of rights the current legislation:
- Charges the transferee on a single land transaction which is an amalgam of the transfer of rights and the ultimate acquisition of the land.
- Disregards any acquisition by the transferor as long as it is completed at the same time and in connection with the acquisition by the transferee.
The revisions are intended to more clearly identify the vendor and how relief from SDLT under the provisions can be obtained.
There will be a minimum consideration rule for transactions where the transferor and transferee are connected or act on non-arm's length terms, to ensure the full price paid to the vendor is charged to SDLT. The transferor will be regarded as making an acquisition for SDLT purposes and will need to make a return. This contrasts with the current position where the transferor's acquisition may be disregarded. The transferor will be able to claim full relief against any SDLT in normal cases where it assigns its rights or enters into a sub-sale transaction with no SDLT avoidance purpose.
Comment
The initial draft legislation issued in December 2012 was very complex and did not (in the eyes of stamp tax practitioners) meet the aim of improving clarity. In addition a number of inconsistencies in the way the draft legislation operated have been highlighted.
SDLT avoidance using 'transfer of rights'
Due to the abuse of the transfer of rights provisions, the Chancellor announced that retrospective legislation will be introduced in Finance Bill 2013 for transactions where the transfer of rights takes place on or after 21 March 2012. The measures will apply where:
- the transfer of rights contract is substantially performed but not completed at the same time as the completion or substantial performance of the original contract;
- the purchaser under the original contract is in possession of the property after the date of completion or substantial performance; and,
- the main purpose or one of the main purposes of the transfer of rights contract is the obtaining of at tax advantage by the purchaser under the original contract.
The purchaser under the original contract is required to notify HMRC of any SDLT due by 30 September 2013, by either submitting a land transaction return (where no return has previously been submitted) or making an amendment to their return.
Comment
Bearing in mind the announcement at Budget 2012 that retrospective legislation would be used to counter SDLT avoidance, it is no surprise that such measures are being used in this area.
Simplification of SDLT charges on leases
The existing rules for accounting for SDLT contain complex administrative arrangements for filing SDLT returns on:
- leases where an original fixed term lease is continued past the end of the term without prior formal agreement to the extension and;
- if before a lease is granted an agreement for lease is entered into and that agreement is substantially performed before a formal lease is subsequently entered into.
In addition the current rules apply a formula to determine whether rent increases after the first five years of a lease are 'abnormal' and require a further SDLT return.
The proposed revisions simplify the SDLT filing requirements in the above circumstances and abolish the 'abnormal' rent increase provisions. Following consultation further refinements are expected to further clarify how the provisions apply.
Comment
These changes will be broadly welcomed by stamp tax practitioners and those involved in property leases.
Real Estate Investment Trusts
The Government will legislate to allow real estate investment trusts (REIT) to treat income from another UK REIT as income of its tax exempt property rental business.
Additionally the Government is considering including REITs within the definition of 'institutional investor'.
Comment
The measure to allow REITs to invest in other REITs and exempt income from that investment is the culmination of announcements in the 2012 Budget and subsequent consultation. It follows prior relaxations to rules attempting to invigorate and extend the use of REITs, to date these collective measures have not really ignited the sector.
The announcement of considering the inclusion of REITs as an institutional investor is a measure many in the property industry have called for. If adopted, it would enable the relaxations to the diverse ownership rules in 2012 to apply to REITs investing in REITs. That, given the tax free status of REITs, may enable more access to capital and create the momentum recent changes have sought to achieve.
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.
