In the run up to the Budget there was much speculation about the introduction of Vince Cable’s “Mansion Tax”; mooted as an annual charge on properties in excess of £2m.
In the event there was no Mansion Tax as such. Instead the government introduced immediate changes to Stamp Duty Land Tax (SDLT) coupled with the announcement of consultation on further measures including an extension of the capital gains tax (“CGT”) regime to UK property owned by certain foreign entities. There is also to be consultation on the introduction of an annual charge on residential properties valued at over £2m owned by non-natural persons with the charge likely to commence on 6 April 2013.
New SDLT rate
A new rate of SDLT of 7% applies to purchases of residential properties by “natural persons” with effect from 22 March 2012 where the consideration exceeds £2m. The previous rate of 5% will apply to contracts entered into before 22 March and completed on or after that date provided there has not been a variation of the contract or an exercise of an option or similar right on or after 22 March or an assignment such that a person other than the purchaser under the contract becomes entitled to call for conveyance. There is anecdotal evidence that the imposition of the new 7% rate has already lead to a reduction in the asking price for affected properties.
Corporate and other “non-natural” purchasers
Historically it has often been attractive to hold UK property through the medium of a company, mainly for IHT and SDLT reasons.
For IHT purposes, a non-UK domiciled person holding a property through a non-UK-registered company has been able to turn a UK asset (liable to IHT) into a non-UK one (exempt from IHT for non-domiciled persons). And for SDLT purposes, a purchase of shares in a property-owning company attracts a Stamp Duty charge of only 0.5% (or perhaps none if all transactions are effected outside the UK) rather than higher rate of duty chargeable on a purchase of the underlying property itself.
Although both these advantages remain, a number of measures have been put into place (or are proposed) aiming to reduce the attractiveness of “enveloping” property in this way. It is evident that the government really does not want residential properties (especially expensive ones) to be owned by companies.
The first measure is that with effect from 21 March a new penal SDLT rate of 15% applies where a “non-natural person” buys a residential property. As with the 7% rate, the new rules will not apply to most contracts made before 21 March but completed after that date. The definition of a “non-natural person” includes collective investment schemes (including unit trusts), companies and partnerships with a corporate partner. A foundation is likely to be treated as a company for these purposes. But the new rate does not apply where the purchaser (although a company) is making the purchase in its capacity as the trustee of a settlement or the nominee of a natural person or of a trustee.
For the purposes of the 15% rate, each individual dwelling is viewed as a separate entity. The obvious example is the purchase of a block of flats where the 15% rate applies only if and to the extent that individual flats are worth more than £2m. However, the special relief for “averaging out” SDLT where a number of separate dwellings are acquired in a single transaction does not apply: so it is not possible to avoid the 15% rate by bundling together a £2m+ property with a cheaper property in a single deal.
There is a limited exemption from the 15% rate for property developers: but the exemption is very limited. For example:
- The acquisition must be made for the sole purpose of developing and reselling the land – so dealers, as distinct from developers, cannot benefit
- The purchaser (or a company in the same group as the purchaser) must have been carrying on the business in question for at least two years before the acquisition. However, HMRC have confirmed that this condition is treated as met by the purchaser if it is met by any company is the same group as the purchaser. This means that a group of companies which forms a new special purpose vehicle for each development is likely to qualify
- The relief is not available to property investment businesses
One particular situation in which the penal 15% rate may bear heavily and unfairly on property developers is where a developer buys a residential property for more than £2m with the intention of demolition and redevelopment. But depending on the precise circumstances, there are a number of strategies which may be available to avoid the inequity of the 15% rate in this situation.
Historically the charge to CGT has been residence based. Broadly, a non-resident has not been liable to UK CGT on capital gains arising on the disposal of UK real property and it is only in limited circumstances that gains made by some non-residents can be re-attributed to and thus taxed on UK residents. In particular it has been fairly easy for people of non-UK domicile to avoid CGT on UK property.
The government proposes to extend the UK CGT regime so as to tax gains on the disposal of residential property in the UK by non-resident, non-natural persons. The measure is likely to take effect from 6 April 2013 and the details are to be subject of consultation. A number of features are not yet finalised including
- Who will be chargeable – presumably the same definition of “non-natural person” as for the 15% SDLT rate; but with the possible inclusion of non-resident trustees
- What will be chargeable – probably only the same kind of “high value” properties as are targeted by the 7% and 15% SDLT rates
- The rate of tax – possibly the 28% rate that currently applies to individuals rather than the (lower) rates of corporation tax.
Annual charge on “enveloped” residential properties worth more than £2m
The “third strike” aimed at property-owning companies is the proposal that there should be an annual charge on residential properties held by non-natural persons at the following rates:
Pending the issue of its consultation document HMRC have published very little further information about the proposed annual charge. However, it appears at present (November 2012) that HMRC have listened to representations that the charge will not apply where the property is let out on a commercial basis to an occupier who is not connected with the owner. We shall further update this note when further details are available.
When the consultation process is complete we shall have a better idea of what if anything should be done regarding existing arrangements. But if you are currently non-UK resident for tax purposes and likely to become resident in the near future then your position should be reviewed now.
Future Inheritance Tax Planning
The penal 15% SDLT charge on “enveloping” residential property worth more than £2m and the proposed annual charge are now likely to deter non-UK domiciles from shifting the situs of such properties by the use of a non-UK company. In future more use is likely to be made of mortgaging such properties and “parking” the sum borrowed outside the UK or simply insuring against the UK liability.