UK: New UK Property Taxes Become A Reality

Last Updated: 28 March 2013
Article by Lyndsey L.M. West

Introduction

The new property taxes affecting high value residential dwellings have been in the pipeline for 12 months - but become a reality from the beginning of April 2013. The new taxes affect properties worth over £2m which are owned by UK or non-UK resident companies (as well as certain other kinds of entities).1

First, the annual residential property tax ("ARPT") will be payable each year. It applies to valuable properties which on 1 April 2013 (the starting date of the new tax) are owned by companies The amount of tax will depend on the value of the property - see the table below.

Second, there is a new capital gains tax ("CGT") charge payable at the rate of 28% on the post-6 April 2013 element of any gain realised on the sale from 6 April 2013 onwards by companies of high value residential properties. (The pre-6 April 2013 element of any gain is still taxable under the normal tax rules).

There are reliefs from both taxes for properties which are used, broadly, for the purposes of commercial trade such as property development or commercial letting.

Annual residential property tax ("ARPT")

The new ARPT is payable in the following bands

  • £2m to £5m at £15k annually
  • £5m to £10m at £35K annually
  • £10m to £20m at £70k annually
  • Above £20m at £140k annually

The value of the property on specified valuation dates is used to determine whether a property falls within the new charge and if so which band applies. The first specified valuation date is 1 April 2012. Subsequent valuation dates are each five year anniversary of 1 April 2012. The date of any purchase of the property by a new corporate owner is also a valuation date.

If a property was worth less than £2m on 1 April 2012 then it will be outside the ARPT until the next valuation date on 1 April 2017 (unless it is purchased by a new corporate owner in the meantime and has risen in value).

Taxpayers have to determine the value of their properties for these purposes. We recommend that professional valuations are obtained. Where a taxpayer considers that the property is within 10% above or below one of the bands they can apply to HM Revenue & Customs for a so-called "pre-return banding check".2

In the first year of the new charge the taxpayer must make a tax return relating to the ARPT by 1 October 2013. The ARPT for the year must be actually paid by 31 October 2013. In subsequent years the return must be made and the tax paid by 30 April in each year.

The new capital gains tax ("CGT") charge

One of the conditions for the new CGT charge to apply is that the property falls within the ARPT described above. This means that if a property is valued at under £2m on 1 April 2012, so that it falls outside the ARPT charge, then a sale for over £2m within the next five years will be outside the new CGT charge.

As mentioned above, only the post-5 April 2013 element of any gain is within the new CGT charge ie for purposes of the new CGT charge the value of high value residential properties is rebased to 5 April 2013. Property owners who are within the new tax must therefore obtain valuations of their property as at 5 April 2013. Taxpayers can elect to disapply rebasing so that the gain subject to the new CGT charge would be calculated by reference to the actual acquisition cost of the property. There are a few cases where it will be advantageous to disapply rebasing, for example if on 5 April 2013 the property is worth less than its acquisition cost.

Gains arising under the new CGT charge are called "ARPT-related gains". If a loss rather than a gain is realised this is known as an "ARPT-related loss". ARPT-related losses may only be set against ARPT-related gains (and not against normal gains). Likewise ARPT-related gains may be reduced only by ARPT-related gains (and not by normal gains).

Reliefs

The same reliefs for commercial trading businesses are available from both the ARPT and the CGT.

The main reliefs are for businesses engaged in property rental, property development or trading in property. Relief is also available for hotels and for farmhouses on farmland occupied by a farm worker engaged in the related agricultural business. We understand that there will be a relief specifically for charities although at the date of this briefing draft legislation is not yet available.

If a relief applies for only part of the year, the ARPT for that year is proportionately reduced. Similarly if relief is available for only part of the period of ownership to which the new CGT charge relates, then the new charge is proportionately reduced.

Conclusion

Some taxpayers have taken steps to dismantle companies owning high value residential properties in order to come outside the new charges. To ensure that the new charges do not apply a company holding such a property will have to be dismantled before 1 April 2013.

In some cases there might be good reasons why a decision has been taken to retain the company holding high value residential property, for example, in order to retain the protection from UK inheritance tax which such a company can provide for non-UK domiciled individuals. Some people are also retaining the company in view of the possibility that if the Labour party wins the next Election, due in 2015, they would try to introduce a "mansion tax".

In those cases where clients accept that the new charges will, or (depending on values) might be payable it will be important to obtain appropriate valuations. As mentioned above for purposes of the new ARPT a valuation is needed as at 1 April 2012, whilst for purposes of the new CGT charge the valuation needed will be at 5 April 2013.

Footnotes

1 The other entities affected are partnerships which include a corporate partner and collective investment schemes.

2 For further details on this see our briefing note of 20 March 2013 entitled "New annual residential property tax: pre-return banding check service from HM Revenue and Customs".

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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