UK: Taxation Of High Value UK Residential Property: Change - Effect - Implications

Last Updated: 19 November 2013
Article by Emma Loveday and Tom Allfree


The Finance Act 2013 brought into force an annual tax on high-value residential property held through a corporate envelope and extended the capital gains tax (CGT) regime to disposals of the same property. Both measures were introduced to target perceived tax avoidance from holding UK property in a company structure.

However the legislation includes exemptions and reliefs for certain categories of property holder, including genuine property developers and investors, which may remove the need for significant reorganisation of existing structures, and should also assist buyers of high end residential property. There is also a form of CGT rebasing relief for all properties affected so that only capital gains that accrue on or after 6 April 2013 are chargeable.

The annual tax (referred to as the Annual Tax on Enveloped Dwellings or 'ATED') came into force on 1 April 2013 and the new CGT charge for disposals of high-value residential property on 6 April 2013.

A brief overview of ATED and the extended CGT rules are set out below.

1. Annual Tax on Enveloped Dwellings (ATED)

  • payable by "non-natural persons" (NNPs): resident and non-resident companies, collective investment schemes and partnerships which have a company as a partner. Trustees do not fall within the definition of a NNP and are therefore not subject to ATED
  • relief (which needs to be claimed annually) for: NNPs which rent out property to unconnected parties on a commercial basis, property developers, farmhouses, properties owned to provide employee accommodation and dwellings that are open to the public on a commercial basis. There are also exemptions for certain types of company such as charities, public bodies and heritage bodies
  • reliefs mean the charge is likely only to apply to owner occupied residential properties worth more than £2 million
  • The current rates of ATED are:-

    Taxable Value of Property £2–5m £5-10m £10-20m £20m +
    Annual Charge £15,000 £35,000 £70,000 £140,000
  • the chargeable period runs from 1 April to 31 March (note this is linked to the corporation tax year) and ATED is apportioned if not applicable throughout the year
  • residential properties will need to be valued every five years, with the first valuation as at 1 April 2012
  • ATED returns and payment for each year will be due 30 days after the start of a period of account i.e. 30 April each year (although there are transitional rules for the period 1 April 2013 to 31 March 2014)
  • the punitive 15% rate of SDLT on purchases of residential property worth more than £2 million will only apply to NNPs who would also be subject to ATED. £2 million properties that are eligible for relief from ATED will attract a 7% SDLT rate

2. Capital Gains Tax (CGT)

  • payable by the same group of NNPs to which the ATED applies: this includes UK resident NNPs as well as non- UK resident
  • applies to disposals of UK residential property where the consideration exceeds £2 million
  • applies only to gains realised on the direct disposal of high value UK residential property. Disposals by non-UK residents (whether natural or non-natural persons), of interests in companies owning high value UK residential property will remain outside the scope of CGT
  • 28% rate of tax: for UK resident NNPs, the new CGT charge will replace the corporation tax charge (23%) that would otherwise apply
  • no principal private residence relief for NNPs
  • as with ATED: trustees are exempt and genuine commercial property businesses (and other NNPs to which one of the ATED reliefs apply) are not subject to the CGT charge
  • rebasing relief introduced so that only gains accruing on or after 6 April 2013 will fall within the charge (unless the NNP elects otherwise)
  • taper relief applies where the value of property marginally exceeds the £2 million threshold
  • affected owners should obtain a market valuation of residential property as at 5 April 2013 to facilitate the CGT calculation on a future sale and any related planning
  • for residential property acquired after 5 April 2013 the actual acquisition cost and allowable expenditure will be used to calculate the taxable gain

3. Options for existing structures

  • Do nothing
  • Take advantage of one or more reliefs
  • Unwind the company structure into direct ownership
  • Unwind the company structure and hold under a nominee arrangement
  • Hold the property at offshore trustee level but consider the inheritance tax implications
  • Hold the property in a foreign LLP but consider the proposed anti-avoidance rules involving partnerships

4. Options for purchases

  • Consider the reliefs
  • Use a trust structure to deal with succession issues and deal with inheritance tax (IHT) by debt
  • Use a company nominee to provide confidentiality
  • Consider direct ownership and deal with IHT by life insurance, debt or co-ownership and appropriately drafted English Wills

5. Conclusion

The availability of reliefs and exemptions may mean that a large number of NNPs fall outside the scope of the new charges. However for those that do not and are considering restructuring, it is worth noting that any complicated restructuring or arrangements for new purchases might trigger the application of the General Anti-Abuse Rule. This rule will apply to tax arrangements which are deemed to be abusive and are entered into on or after 17 July 2013. If a corporate structure is dismantled to avoid the new charges, thereby exposing the owner to an IHT liability, care must be taken in using borrowing to mitigate this liability, as the Finance Act 2013 contains rules restricting the deductibility of loans for IHT purposes. The government is also targeting "the abusive use of partnerships" and this may include complicated restructuring involving foreign LLPs. What is clear is that this is now a tricky area and one under the spotlight, so appropriate planning is important.

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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