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Annual Charge and Capital Gains Tax on High Value Residential Property

David Anderson, solicitor advocate and tax adviser at Sykes Anderson LLP Solicitors and Chartered Tax Advisers in London, England.

Please note that tax law is a complex subject and you should not rely on this article without professional advice on the facts of your case.

Non-resident and non-UK domiciled individuals have often structured their purchases of UK property via offshore structures. There are numerous reasons for putting these structures in place including confidentiality, limiting liability and tax mitigation.

The government has taken the view that high value properties are being held in such structures in order to allow disposals to take place via share sales, which are outside the scope of UK stamp duty land tax. To counter this, new measures were announced in the 2012 budget. These measures included a new higher rate of stamp duty land tax, an annual charge on such structures and a capital gains tax charge on disposals of high value property.

These rules apply only to residential property valued at more than £2million.

The Government has now released draft legislation and responses to consultation which clarify how these measures will apply. In general these measures soften the application of the Government’s proposals. This will mean that ownership via offshore entities may continue to be attractive in certain circumstances.

Annual Charge

Draft legislation released by the Government confirms that, from 1 April 2013, certain “non-natural persons” owning residential property valued at £2million or more will be subject to an annual charge based on the following bandings:

Property value Tax
£2M - £5M £15,000
£5M - £10M £35,000
£10M - £20M £70,000
£20M + £140,000

The draft legislation also confirms that trusts will not be treated as “non-natural persons” for the purpose of this legislation. As such properties owned directly by trusts fall outside the scope of this annual charge. Essentially the charge applies to companies or to partnerships of which a company is a member.

Exemptions

It had always been the intention that these rules would not apply to property developers. This exemption has been maintained in the draft legislation. Helpfully the exemption has also been extended to apply to residential properties which are being let on a commercial basis i.e. with a view to making profit. Responses from the Government to its original consultation document also set out that the higher 15% SDLT rate will not apply when the property is being acquired with the intention to let it out to tenants. These exemptions will mean that buy-to-let investors can continue to structure their ownership via companies without incurring the new SDLT higher rate or the annual charge. There are anti-avoidance measures which prevent property from being let to connected parties.

During its period of ownership, the company will fall outside the annual charge, so long as it continues to let out the property (or is at least trying to let the property out i.e. advertising for lettings and not allowing say family members to occupy the property). If it ceased its letting activity, it would then come within the annual charge. There may also be a need to top-up the SDLT if the rental activity ceases.

Capital Gains Tax

In addition to the annual charge and stamp duty land tax changes, the Government also announced a new capital gains tax charge on non-resident non-natural persons disposing of UK residential property for more than £2million. Up to now these entities have fallen outside the scope of UK tax on their profits as long as they were not trading in the UK through a permanent establishment.

Responses from the Government to the consultation on this charge have clarified and narrowed how this will apply.

These responses confirm that the tax will be charged at the rate of 28%. However, contrary to previous indications, there will be a re-basing of the property value on 6 April 2013. Therefore any increase in value to date will not be chargeable. If/when the property is sold; the tax charge will be based on the difference between the sale price and the value on 6 April 2013, rather than the original purchase price.

A further change is that the new capital gains tax charge will only apply to disposals of the underlying property by the offshore company. There will be no charge on the disposal of shares in companies which own UK residential property, which differs from the proposals announced in the 2012 Budget.

The Government had suggested that the capital gains tax charge would apply to disposals by trusts as well as companies. The recent announcements have altered this position so that the new capital gains tax regime shall apply only to companies; and not to trusts.

It is also envisaged in the draft legislation that companies which are letting out the property will be exempt from this charge as they are from the stamp duty land tax and annual charge provisions.

Structuring in the future

The result of the new legislation is that offshore companies may still be suitable vehicles for ownership of buy to let investments although this will all depend on the circumstances of each case. When the property is to be available for the ultimate beneficial owner (i.e. not let out to tenants) ownership by a company may be less attractive. When this is the case there are still choices for structuring the acquisition.

These options would include ownership via a trust, or the use of a nominee company; depending on the priorities of the individual.

Investors may also wish to consider basing the property owning company in a jurisdiction which has a tax treaty with the UK, rather than one of the more typical offshore jurisdictions. This may avoid the new capital gains tax rules if the relevant treaty provides that profits of a company are taxable only in the country where the company is resident. These treaties need to be considered carefully to determine whether they also provide relief from the annual charge.

In all cases, the structuring will depend on the particular circumstances of the investment. You should seek specific advice on structuring when acquiring property in the UK.

December 2012

David Anderson
Solicitor Advocate and Chartered Tax Adviser