The last few weeks have brought unwelcome news for both non-resident owners of UK residential property and those holding UK residential property in 'enveloped' structures. What will this mean practically for UK property owners and are further measures likely?

Extension of the taxation of 'enveloped' properties

The government introduced measures in 2013 to discourage the 'enveloping' of high value residential property. Under these measures high value single dwelling interests 'enveloped' by companies, or certain collective investment schemes and partnerships are subject to the following taxes.

  • 15% Stamp Duty Land Tax upon acquisition.
  • Capital Gains Tax (CGT) at 28%.
  • A sliding scale of annual charges up to a maximum of £140,000 (increased to a maximum of £143,750 for the 2014/15 year).

These measures previously only applied to dwellings valued in excess of £2m. However, from 20 March 2015 enveloped single dwelling interests with a value in excess of £500,000 will be subject to 15% SDLT on acquisition. From 6 April 2015 single dwelling interests with a value in excess of £1m will be brought into the annual charge and higher CGT regime and from 6 April 2016 the threshold will be reduced further to £500,000.

Fortunately, there continues to be a wide range of reliefs covering almost all situations where property is held for genuine commercial purposes. However, where dwellings breach the threshold there remains the added compliance burden for property businesses of submitting an annual return to claim relief from the annual charge.

It remains to be seen whether the Government will introduce further measures given that, anecdotally, de-enveloping has not happened on a wide scale. Inheritance tax shelter, one of the principal remaining benefits of holding property in an 'enveloped' structure, could be the government's next angle of attack.

CGT charge for non-residents disposing of residential property

The Government proposed extending a CGT charge to non-residents holding UK residential property in the 2013 Autumn Statement and a long awaited consultation document fleshing out their proposals was released shortly after the 2014 Budget. The key proposals are as follows.

  • The new CGT charge will only apply to gains arising post April 2015.
  • Dwellings or properties suitable for use as dwellings will be subject to charge (although certain communal accommodation will be excluded).
  • The CGT will apply to most ownership structures including ownership through companies, partnership and direct ownership. However it will not apply to REITs and funds with a 'genuine diversity of ownership'.
  • The rate of CGT will be broadly equivalent to the rate of CGT for UK residents and private residence relief will continue to be available to individual owners. However consideration is given to changing the terms by which individuals can elect which of their properties is their main residence, possibly imposing an onus of proof and record keeping obligations.
  • A withholding tax will be introduced to mitigate avoidance.

The rules are likely to have a more limited effect on individuals or companies based in a country that has an appropriate tax treaty with the UK. This is because tax treaties will often allow non-residents to offset UK gains against their gains liability arising in the jurisdiction in which they are resident.

This new CGT charge is unsurprising given the current conditions for the UK residential property market and the current drive against cross border tax avoidance.

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