In March 2012, the UK government announced that it would be introducing a series of measures designed to counter perceived widespread avoidance of UK stamp duty land tax ("SDLT") using offshore corporate vehicles. The measures would include:
-
a new SDLT rate of 15% for purchases of high value residential UK real estate by "non-natural persons" (the "acquisition charge");
-
an annual charge on high value residential UK real estate held by non-natural persons (the "annual charge");
-
a charge to capital gains tax on the disposal of an interest in a non-natural person holding high value residential UK real estate (the "CGT charge").
The legislation
implementing the acquisition charge was included in Finance Act
2012 and has had effect since 21 March 2012. Draft legislation to
implement the annual charge was published shortly after the
Chancellor's autumn statement in December 2012. The legislation
will have effect from 1 April 2013. The draft legislation
implementing the CGT charge was published on 31 January 2103 and
will have effect from 6 April 2013.
The purpose of this note is to provide a brief overview of the
legislation relating to the acquisition charge and the annual
charge and to give an overview of measures which might be taken to
lessen the impact of these measure on non-UK owners of UK real
estate.
Summary of the Legislation
Property to which the new rules apply
The new rules only apply to residential property in the UK.
Commercial property is wholly outside these measures and can
continue to be owned through offshore special purpose
vehicles.
For these purposes, residential property is defined as a dwelling,
that is to say a building, or part of a dwelling if it used as a
dwelling or a building or part of a building that is being adapted
or converted for such use.
Persons who are liable for the tax
Both the acquisition charge and the annual charge will only
apply where the property is held by a company, by a partnership
which has one or more corporate partners, or by a collective
investment scheme. The collective investment scheme definition will
catch entities such as unit trusts but is complicated and specific
advice should be sought on whether any particular entity falls
within the definition.
The CGT charge will apply to any person (other than an individual),
who is, or has at any time in his period of ownership been, within
the annual charge. By defining persons in this way, the legislation
catches, intentionally, properties held within UK corporate
structures. This is most likely to avoid a challenge under EU law.
However, this may have some unintended adverse consequences for
properties held through UK special purpose vehicles, in particular
because reliefs from the annual charge are assessed on a daily
basis but a single day of unrelieved ownership will result in the
whole of a capital gain being subject to the CGT charge.
The value condition
The legislation will apply to single dwellings having a value
in excess of £2m. In the case of the acquisition charge,
whether the dwelling has a value of £2m is tested by
reference to the consideration which is paid for the interest
(including any consideration in non-monetary form which would count
as consideration in determining the amount of SDLT payable on the
acquisition).
In the case of the annual charge, the provisions are more
complicated. To determine whether an interest is within the charge
(i.e. exceeds £2m) and if so the amount of tax charged (as to
which, see below), the legislation provides for a series of
valuation dates. Where the property was held within the relevant
entity at 1 April 2012, the first valuation date will be 1 April
2012. Thereafter, each fifth anniversary of the preceding valuation
will also be a valuation date. If the interest is acquired after 1
April 2012, the first valuation date will be the date of
acquisition. The second valuation date will be 1 April 2017 and
subsequent valuation dates will fall at 5 year intervals
thereafter.
The value of a property for the annual charge will be its open
market value. Like most UK taxes the annual charge is a self
assessed tax and therefore it will be for the relevant taxpayer to
assess the market value of a property. However, HM Revenue &
Customs can (and no doubt will) enquire into returns and can object
to the value placed on the property by the taxpayer if it thinks it
too low.
The amount of tax charged
The amount of tax charged in respect of the annual charge
depends on the value of property on the preceding valuation
date.
Value of property
|
Amount of tax payable
|
More than £2m but not more than £5m | £15,000 |
More than £5m but not more than £10m | £35,000 |
More than £10m but not more than £20m | £70,000 |
More than £20m | £140,000 |
The amount of tax
chargeable will be increased in line with inflation.
The CGT charge will be levied at 28% of the gain on disposals where
the consideration exceeds the £2m threshold. However, in
order to avoid disposals just above the threshold being subject to
tax at a very high marginal rate, the legislation provides for a
form of tapering relief for properties disposed of for an amount
close to the £2m threshold.
Common
reliefs
Perhaps the most important relief from the legislation is that
real estate used for a property letting business is not within the
annual charge if it used in the course of a property rental
business. However, the definition of what constitutes a property
rental business is quite complicated and, for example, if the son
of the majority owner of a special purpose vehicle occupied the
property (even if he paid a commercial rent), the property would
not considered to be used for the purposes of a property letting
business. The other significant relief relates to real estate held
property developers. Again, there are significant limitations on
that relief which will have to be reviewed on a case by case
basis.
Commentary
Until the enactment of Finance Act 2012, non-resident
individuals and trustees would have been invariably advised to hold
UK real estate through SPVs. Although the possibility of SDLT
savings on a sale of the SPV would no doubt have been considered,
this structure also avoided the possibility of UK inheritance being
charged on the death of an individual. Following Finance Act 2012,
this kind of structure, while still potentially open to
non-resident individuals and trustees would become very expensive.
The combination of the acquisition charge and the annual charge
would make such a structure prohibitively expensive.
Where a property is already held within a structure that would
attract the annual charge (and would therefore attract the CGT
charge as well), owners would be well advised to review the
structure and see whether it can be unwound at an acceptable cost.
The level of the annual charge, together with the fact that UK
capital gains tax will be charged at 28% on any gain accruing after
2013 means that reorganisation of the structure would be the
preferred way forward barring unforeseen costs. It will be
necessary to consider the UK inheritance tax consequences of the
proposed reorganisation and certain other commercial matters: for
example, the effect of the reorganisation on any financing taken
out for the acquisition of the structure.
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.