The Government has set out its objective of ensuring that, in its view, high value residential property transactions are taxed fairly. The result is new tax legislation for UK residential properties with a value in excess of £2,000,000.
Introduction
The Government believes that currently high value residential properties are often acquired and held by non-natural persons to benefit from lower levels of certain UK taxes. In light of this, an increased rate of Stamp Duty Land Tax (“SDLT”) was introduced with effect from 21 March 2012 and two additional tax charges are set to be introduced in April 2013.
The following tax changes have been/are proposed to be introduced;
1. From 21 March 2012 a new 15% rate of SDLT applies to acquisitions, by non-natural persons, of UK residential properties with a value in excess of £2,000,000.
2. From 1 April 2013 it is proposed that non-natural persons will be subject to an annual tax charge in respect of UK residential properties, with a value in excess of £2,000,000.
3. From 6 April 2013, UK residential properties which are disposed of for proceeds in excess of £2,000,000, that result in a gain, by non UK resident non-natural persons, will be subject to Capital Gains Tax (“CGT”).
We summarise below the key points of each.
15% SDLT
- The new 15% SDLT rate was effective from 21 March 2012.
- As outlined above, if a non-natural person purchases a UK residential property with a value in excess of £2,000,000, they will now be liable to SDLT at a rate of 15%.
- For the purpose of this SDLT charge, a non-natural person is broadly a company, corporate entity, partnership with a corporate member or a collective investment vehicle. Whether or not UK resident.
- Generally, trusts (other than bare trusts) and charities are excluded.
- There is an exclusion for property development companies but this contains strict conditions, all of which must be met. Generally, these are that the company is a bona fide business which has been trading for at least 2 years and has purchased the property with the intention of re-development and re-sale.
Annual charge
- The proposed new annual charge is to take effect from 1 April 2013.
- The annual charge will apply to any non-natural person who owns a UK residential property with a value in excess of £2,000,000.
- For the purpose of this annual charge, a non-natural person is broadly a company, other corporate entity, partnership with a corporate member or a collective investment vehicle. Whether or not UK resident.
- Like with the new 15% SDLT, there are likely to be exclusions for certain trusts, charities and possibly some property development companies (subject to certain criteria).
The proposed annual charges are as follows;
| Property value (£) | Proposed annual charge (£) |
|---|---|
| 2,000,001 – 5,000,000 | 15,000 |
| 5,000,001 – 10,000,000 | 35,000 |
| 10,000,001 – 20,000,000 | 70,000 |
| 20,000,001+ | 140,000 |
It is expected that the charge will rise each year in accordance with the Consumer Price Index.
- The valuation of the property will be self-assessed by the person liable. The initial value will be that as at 1 April 2012 (or later if not already owned) and will be subject to a revaluation every 5 years.
- A separate annual return will be required for each UK residential property held (that exceeds the value outlined). One single payment however can be made.
- If both the freehold and the leasehold of the property are held by non-natural persons, and the value of each interest exceeds £2,000,000, both entities will be liable to the annual charge.
- Currently, strict payment and filing deadlines have been proposed as regards to the return and payment of the annual charge.
CGT consequences
- The proposed extension of CGT to gains on the disposal of UK residential properties sold for more than £2,000,000, by non-resident non natural persons, is to take effect from 6 April 2013.
- By way of background, currently only UK resident individuals are subject to CGT on the disposal of assets at a gain. UK resident companies are subject to Corporation Tax on any chargeable gains they realise.
- The proposed CGT rate that will apply has not yet been established.
- The CGT charge will apply to non UK resident non-natural persons only. Non UK resident individuals will not be affected.
- For the purposes of this extension to CGT, a non-natural person is;
– a company or other corporate entity,
– trust structures (excluding bare trusts), including trusts where the trustees are individuals rather than companies.
– collective investment vehicles.
– personal representatives.
– clubs and associates.
– existing entities in other jurisdictions which hold UK residential property. - Any losses realised in respect of UK residential properties will be ‘ring-fenced’ and thus only available to offset again current or future gains realised from UK residential property.
- There will not be an automatic increase in the base cost of underlying properties to bring this up to the value as at 6 April 2013. Therefore existing inherent gains not currently exposed to CGT may become so on a disposal of a property on or after 6 April 2013. This makes the new legislative effectively retroactive.
Conclusion
Two of the three tax changes have not yet been formally introduced. These tax changes could result is a much higher tax burden for persons with an interest in high value UK residential property.
Owners of high value UK residential property should seek advice well ahead of April 2013 to plan for the incoming tax changes. Factors that will require consideration are the personal circumstances of the ultimate owner(s) of a property, the need for confidentiality, Inheritance Tax exposure, residence and domicile matters, inherent capital gains and SDLT.
Contact Us
For further information on the tax changes to high value UK residential property, or property tax planning in general, please contact us on 01788 539000.
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