Article by Verfides
On 23 March 2012 we published a Client Alert on the News section of our Website ( http://www.verfides.net/images/uploads/Budget_2012.pdf ) reporting on the announcements made in the UK Budget. One of the most important of those announcements was the proposal to make major changes to the taxation of high value residential property in the UK.
The Government has now provided further details of the changes it intends to make in a Consultation Document. The Consultation period runs until 23 August 2012, after which draft legislation will be published in the Autumn, for inclusion in the 2013 Finance Bill. This article reports on the Consultation Document.
The 2012 Budget introduced some immediate changes to the taxation of residential property transactions:
- The introduction of a general 7% Stamp Duty Land Tax (SDLT)
rate for the purchase of residential property worth in excess of
- The introduction of a 15% "super rate" of SDLT for
properties worth in excess of £2 million when acquired by a
company or certain other non-natural persons
- The outlawing of schemes artificially using stamp duty sub-sale
relief to avoid duty on property purchases.
In addition, proposals were announced for further tax charges on high value residential property held by non-natural persons:
- An annual SDLT charge; and
- The imposition of a capital gains tax on the sale of such
The aim of the proposals was to deter people from buying and holding residential property through corporate and other "envelopes", as it was assumed that these vehicles are then used to dispose of such property free of SDLT by transfer of the interest in the holding vehicle rather than the property itself.
The Consultation Document has provided further details of the Government's proposals although, dependent on the responses received, these may be subject to change.
It is confirmed that an annual tax charge will be applied to companies and some other non-natural persons owning residential properties valued in excess of £2 million. The rates are confirmed as:
£2m - £5m
£5m - £10m
£10m – £20m
Further details were given regarding the annual charge:
- It is confirmed that it will only apply to certain
"non-natural" persons. This includes companies, other
bodies corporate (it is not clear whether this will catch UK LLPs),
collective investment schemes and partnerships including one or
more such entities.
- A company acting solely in its capacity as a trustee, or when
it acts merely as nominee with no underlying beneficial interest in
the property, will not be caught.
- A property development business will be excluded from the
charge, but only where it has been operating for two years. It is
expected that the two year requirement will raise significant
objections during the consultation process.
- For properties owned on that date, the charge will be based on
the open market value at 1 April 2012; the acquisition value will
be used if purchased later. This value will then be used for the
purposes of the annual charge until 1 April 2017 – a
valuation will only be required every five years.
- It will be the responsibility of the taxpayer to self-assess
the value of the property and return in on an annual tax return.
Although a non-professional valuation is permissible, the annual
return can be the subject of an HMRC enquiry and penalties may be
levied for under-valuation. HMRC will not however levy penalties
where a suitably qualified professional valuer has been
commissioned – guidance will be provided on this
- The return will require details of the address of the property,
the Land Registry title, the beneficial owners of the property and
their address and the self-valuation and applicable band. It is
unclear whether the term "beneficial owner" refers, in
the case of a company, to the company itself or to its ultimate
- The annual period of account for each return will begin on 1
April each year; the return will be due on 15 April of the same
year – i.e. 15 days after the start of the period of
account, together with the full up-front payment for the year (the
first return and payment for the period of account 1 April 2013 to
30 March 2014 will not however be due until 1 October 2013).
Capital Gains Tax Charge on Sale
The Consultation Document confirms the proposal for a capital gains tax charge on certain non-resident non-natural persons when they dispose of UK residential property from 1 April 2013. The charge is again restricted to the sale of residential property worth in excess of £2 million.
Two significant points to bear in mind:
- No rate has been announced and this will not form part of the
consultation process – it will instead be decided by the
Chancellor in the March 2013 Budget.
- The gain will be assessed on the entire period of ownership
– i.e. there will be no rebasing of the asset for tax
purposes at the time the legislation comes into effect.
Other details confirmed or announced in the Consultation:
- Non-natural persons will include all those subject to the
Annual Charge, but in addition also trusts (whether or not the
trustees are individuals, although bare trust or nominee
arrangements are excluded), personal representatives, clubs and
associations and "entities that exist in other jurisdictions
that allow property to be held indirectly." The exact scope of
this last phrase is not yet defined.
- Partnerships will continue to be treated as transparent for
capital gains tax purposes, meaning that any tax liabilities on the
disposal of a partnership asset will accrue instead to the
partners. Such partners will then only be subject to a UK capital
gains charge where they are a "non-natural" person. Again
the treatment for a UK LLP, which is a body corporate, is
- The capital gains charge will be extended to disposals of
interests in holding vehicles, 50% of whose assets by value consist
of UK residential property. This will include shares in
non-resident property holding companies but it is not clear if it
will apply to the disposal of an interest in a partnership.
Whilst we welcome further clarification of the proposed changes, there are still a number of uncertainties and contradictions which will need to be addressed during the consultation process.
Due to the scope of both the annual and capital gains charges (particularly the fact that gains will be levied from April 2013 on the entire ownership period) there is no doubt that restructuring will be required in many cases for existing holding structures before 1 April 2013.
When considering suitable replacement structures, it will be important to ascertain the reason for an individual using a corporate or other holding vehicle. In our experience, the main considerations are:
- Confidentiality/non-disclosure of ultimate beneficial
- 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
Therefore, whilst it might appear at the outset that the natural replacement for a corporate structure is direct personal ownership, this will not be suitable for many clients who value above all else confidentiality. It appears at present that certain nominee and partnership structures may be the most suitable replacements but this will depend to some extent on the outcome of the consultation process.
There is a limited window of opportunity to restructure. Given that draft legislation will be published in September 2012, to become law by April 2013, owners with structures that may be affected should be seeking advice now. Please contact Verfides for an initial discussion of the options available to you.
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.