UK: Ownership Of UK High Value Residential Property

Last Updated: 1 July 2013
Article by Terence Pay

Recently the UK Government has introduced legislation that has made major changes to the taxation of high value residential property, particularly those acquired or held by companies or other non-natural persons (NNPs):-

  • The 2012 Budget introduced the 15% rate of stamp duty land Tax (SDLT) on acquisitions of single dwellings valued at more than £2m held by companies and certain other non-natural persons; and
  • The 2013 Budget introduced the Annual Tax on Enveloped Dwellings (ATED) which came into effect from 1 April 2013 and UK capital gains tax (CGT) was extended to certain disposals of high value residential property with effect from 6 April 2013.

Below is a summary of the main provisions of the ATED and extended CGT legislation affecting high value residential properties; alternative holding structures for such properties are then discussed.

Annual Tax on Enveloped Dwellings (ATED)

ATED is the new term for what was previously known as the "annual residential property tax". The ATED will be applied to certain NNPs owning residential properties valued in excess of £2 million, from 1 April 2013. The rates are:

Property Value £2m - £5m £5m - £10m £10m – £20m >£20m
Annual Charge £15,000 £35,000 £70,000 £140,000

The NNPs which may be taxable under the ARPT are restricted to:

  • Companies, where that company has a beneficial interest in such a property (i.e. not where it acts as mere nominee for an individual);
  • Partnerships, where one or more partners is a company; and
  • Collective Investment schemes.

Trustees (including corporate trustees) are not subject to the ATED where they hold property directly.

Extended Capital Gains Tax (CGT)

With effect from 6 April 2013 the CGT rules were extended to impose a new CGT charge on certain non-natural persons when they dispose of UK residential property. The extended charge is again restricted to the sale of residential property worth in excess of £2 million. The rate of CGT applicable to disposals under the extended rules will be 28%. Where the property was purchased before 6 April 2013 but disposed of after that date, the extended CGT charge will only apply to the part of the gain which accrued on or after 6 April 2013. Trustees, whether UK resident or not, are not within the extended charge to CGT on direct disposal of such properties: the definition of NNP used for CGT purposes is the same as that used for the ATED. (Note that UK-resident trustees remain subject to the existing CGT legislation whereas non-resident trustees are generally outside the charge of UK capital gains tax).

Exemptions

Exemptions from the 15% SDLT rate, the ATED charge and the extended CGT charge include:

  • Properties acquired in the course of a property development business
  • Properties let out as part of a property rental business where let to third parties on a commercial basis (in most cases this will exempt properties acquired as "buy-to-lets")
  • Farmhouses and properties held by trading companies for the use of employees

Structuring New Purchases for Non-UK Residents

Whilst some pre-April 2013 corporate structures have been dismantled, some have decided to retain these existing arrangements and accept the ATED charges. This is particularly where a corporate structure continues to provide significant protection from UK Inheritance Tax (IHT) or where there would be a high tax cost in restructuring. For new purchases, the use of a company as a beneficial owner is unlikely to be viable, unless that company can qualify for one of the above exemptions. It will be important to ascertain the goals of the investor in choosing a property ownership structure. 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

Alternatives to beneficial ownership by a company include:

  • Personal Ownership

    Property owned by one or more individuals is not generally subject to the ATED regime. However, the names of the owners will appear directly on the UK Land Registry which is publicly accessible.

    Where the property is owned by a non-UK resident, any capital gain arising on the disposal of the property would be exempt from UK CGT.

    The main tax disadvantages of personal ownership are:

    • That the individual will be holding UK-situs property directly, the value of which is potentially liable to an inheritance tax (IHT) charge at 40% on his or her death. Any UK IHT may potentially be minimised by securing a loan on the property but further advice should be taken.
    • Profits derived from UK rental receipts will be taxable in the UK at an income tax rate of up to 45%, depending on the level of profit. If the property is being rented to third parties, it may therefore be preferable to hold it through a non-resident company which can avail of an exemption from ATED. The tax rate on the rental profits would then be capped at 20%.
  • Ownership through a Nominee Entity

    For an individual wishing to maintain confidentiality with respect to the beneficial ownership of residential property it is possible for a property to be purchased through a nominee company.

    The main advantages of this approach are:

    • The name of the company will appear as the legal owner at the Land Registry so there will be no publicly available record of the beneficial ownership of the property;
    • The 15% Stamp Duty Land Tax rate, the ATED and extended CGT charges will not apply to the company because it is purchasing the property in a nominee capacity; and
    • Any capital gain arising on the disposal of the property would be exempt from UK CGT where the beneficial owner is non-UK resident.

    The same income and inheritance tax analysis will apply as for personal ownership.

  • Ownership through a Partnership

    If the property is purchased through a partnership with no corporate member, each of the partners will be treated as owning a proportion of the property in accordance with their capital share and the property will not be within the ATED regime.

    The partnership will appear as the legal owner at the Land Registry so there will be no publicly available record of the beneficial owner of the property.

    Any gain arising on the disposal of the property would be exempt from CGT in respect of any partners who are not resident in the UK.

    The same income and inheritance tax analysis will apply as for personal ownership as the partners are deemed to own their share of the property personally.

    It has been suggested that the ownership of an interest in an offshore LLP may constitute a non-UK situs asset for IHT purposes, thereby providing full UK IHT protection without coming within the ATED regime. Suggested jurisdictions are Mauritius and Jersey. This has not been tested and there is some disagreement as to whether this provides the desired IHT protection.
  • Ownership through a non-UK Resident Trust

    The general advantages of trust ownership are well known but the main benefit is that of asset protection. Property held directly by a trust is not within the ATED regime which means trusts still have a part to play in UK property structuring.

    It is generally possible to structure the ownership of a property by a non-UK resident trust so that any capital gain arising will be exempt from CGT, even if the property is occupied by a UK-resident beneficiary on a rent-free (or below market value rent) basis.

    The main challenge with direct trust ownership is the IHT position. A trust is subject to its own "mini" IHT regime. That regime imposes (broadly) a 6% IHT charge on the net value of UK-situs assets once every 10 years on the anniversary of the creation of a trust although this can be reduced with short-term borrowing at the time of each anniversary. If the property is occupied by the settlor of the trust then there are further IHT considerations and specific advice should be sought.

    The trust will pay income tax at a rate of 45% on all profits derived from UK rental receipts; however, where rented to third parties a non-resident company may again be interposed so that the tax rate is limited to 20% whilst the ATED exemption can be claimed.

Filing Obligations

Entities falling within the ATED regime are required to file an annual ATED return. The first accounting period commenced on 1 April 2013 so that an entity owning a property within the regime at that date will need to file an ATED return for 2013/14, even if the property has subsequently been sold. It should be noted that even entities which can avail of one of the above ATED exemptions (e.g. the rental or property development exemptions) will still have to file an annual ATED return to claim the relief, even though there will be a nil or reduced tax charge. The 2013/14 ATED return must be filed by 1 October 2013 and any tax due must be paid by 31 October 2013. The returns have not yet been published so it is not clear precisely what information will be required, although a self-assessed valuation as at 1 April 2012 will certainly be required. Subsequent ATED returns will be due on 30 April each year, effectively in advance of the tax year. The return for the year ended 31 March 2015 will therefore be due on 30 April 2014 together with any tax payment by the same date. If the status of the property subsequently changes (for instance, a relief begins or ceases to be available part way through the year) an amendment may be filed with any tax adjustment either paid or refunded.

Verfides' Comments

The purchase and holding of high value UK residential property now requires careful consideration. Depending on the goals of the investor, there are a range of structures which can provide tax efficiency whilst maintaining confidentiality. Tax-efficient structuring is particularly enhanced by generous exemptions from the ATED regime which are available, but professional advice should be taken in each case.

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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