UK: Budget Update - How The Chancellor’s Speech Will Impact The Property Sector

Last Updated: 23 April 2013
Article by Robert King

The Budget saw confirmation of the introduction of the new annual tax on enveloped dwellings (ATED) with effect from 1 April, and the extension of UK capital gains to certain disposals of high value residential properties on or after 6 April. Both of these regimes apply to single dwellings valued at more than £2m held by companies and certain other non-natural persons. Together with the penal 15% rate of stamp duty land tax (SDLT) on acquisitions of such properties by non-natural persons, which took effect from Budget day last year, these complete the three sets of measures to combat the so-called 'enveloping' of high end UK residential property in companies (usually London-based). The Government was convinced that such ownership structures were being used to avoid SDLT by selling the shares in the company rather than the property. The motivation is, in fact, not usually SDLT avoidance. It may be down to inheritance tax (IHT) planning, avoiding forced heirship issues, or a need for anonymity. Where such factors are relevant, alternative solutions may now need to be considered.

On a more positive note, there have been extensive consultations over the last 12 months and these have resulted in a wide range of exemptions common to all three regimes which will take out most situations where the property is used for legitimate business purposes. Where an exemption is available, the right answer may be to do nothing. Otherwise, a decision needs to be made as to whether or not to de- envelope. Many non-doms, for instance, may see ATED as a reasonable price to pay for continued IHT shelter. De- enveloping itself raises complex tax issues which will require careful planning. The right answer will be very fact specific.

Fortunately, with rebasing to April 2013 for the new capital gains charge, the pressure to take swift action has receded somewhat and a considered view can be taken.

There is little doubt that these new taxes will have a distortive effect on the market. This will particularly be the case for properties around the crucial £2m threshold. Indeed, anecdotal evidence already suggests that this is happening with estate agents noting a sharp fall in transactions. There will also be a distortive effect around each of the ATED band thresholds. In addition, the exemptions from the 15% SDLT charge do not come into effect until Royal Assent to the Finance Act, usually in late July. Transactions which will benefit from these exemptions will undoubtedly be deferred, leading to further market distortion.

Also included in the Budget was a rewrite of the sub-sale rules. These rules have been at the heart of most SDLT avoidance, as a result of poor drafting of the legislation and consultation has been on-going with regard to reforming the sub-sale provisions. Unfortunately, HMRC has gone for a substantial rewrite, with highly complex draft legislation being put forward. It is questionable whether this is needed given existing anti-avoidance rules and the impending General Anti-Abuse Rule (GAAR). Sub-sale relief serves a crucial role in many commercial transactions which have no element of avoidance attached to them at all. Despite HMRC saying that it does not want the new rules to impact on such transactions, the draft legislation is so complex and unclear that there must be a concern that it will have a detrimental effect.

Finally, we saw retrospective legislation to outlaw certain SDLT avoidance schemes with effect from March last year. Retrospection in tax law is rare – it goes against the principle that a person should be able to proceed on the basis of the law as it then stands. On the other hand, George Osborne did say in his Budget speech last year that he would not hesitate to use retrospective legislation if it was found that the SDLT rules, in particular the sub-sale rules, were being abused. Clearly this was no empty threat. This will act as a further deterrent, as if any were needed, to people who might otherwise consider taking part in aggressive SDLT avoidance. It is, however, to be fervently hoped that this is a one off and not the thin end of the wedge. Retrospective legislation is bad in principle and should be resisted in all but the most extreme circumstances.

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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