Finance Act 2012 introduced an increased rate of SDLT on acquisition of residential property over £2m. The draft Finance Bill 2013 confirms the annual charge on the value of residential property over £2m, and capital gains tax on the disposal of residential property over £2m. However, reliefs should mean that the only structures affected are those which hold residential property which is occupied by a shareholder or beneficiary.
On the same day as the chancellor delivered his Autumn Statement, his Irish counterpart outlined an annual tax on the value of all Irish residential properties, including those held by individuals. The draft Finance Bill 2013 published on 11 December 2012 outlines the more limited new taxes on UK residential property held by companies and other ‘non-natural persons’.
Certain proposals are not yet included in the draft legislation, but are outlined in the HM Treasury response to the consultation titled Ensuring the fair taxation of residential property transactions. In addition, some proposals are subject to further consultation, but the main principles now appear to be established.
This article outlines the three new taxes which have been introduced:
Despite responses to the previous consultation, the government remain committed to all three measures.
However, the latest proposals significantly extend the reliefs which will be available from these taxes. As a consequence, the only structures which should be affected are those which hold residential property which is occupied by a shareholder or beneficiary.
The reliefs will exclude most structures from the new rules. Relief from all of these new taxes (the 15% rate of SDLT on acquisition, the annual charge and capital gains tax) will be available for:
These reliefs are not available if the property is occupied by connected parties (as defined in CTA 2010 s 1122).
Relief from the 15% SDLT charge on acquisition will be withdrawn if no relief applies in the three years following the date of acquisition. A developer who is unable to sell a property should still qualify for relief if it is held for rental purposes. However, relief could be withdrawn if the property were let to shareholders, or if it were simply held with no intention of sale or rental.
Relief from the 15% rate of SDLT on acquisition will only be available under the new rules from the date Finance Act 2013 receives Royal Assent. Until then, relief is only available to property developers who have been trading for at least two years. Where the company making the acquisition is a member of a group, the two year condition may be satisfied by any member of the group.
This does present problems (as HM Treasury acknowledges in the response to the consultation) because a property developer will typically establish separate special purpose vehicles (SPVs) to undertake different developments.
As I have outlined in a previous article, a potential solution to the two year requirement is for a developer to acquire an existing property development company (from a third party or controlling shareholder). Due diligence would need to be undertaken and an appropriate price negotiated.
Finance Act 2012 has already introduced two changes to the taxation of residential property:
A non-natural person is defined as a company, a partnership which has a corporate partner or member or a collective investment scheme.
An annual residential property tax (ARPT) will apply from 1 April 2013 where UK residential property valued at over £2m is owned by a ‘non-natural person’. The definition of a ‘non-natural person’ will be the same as for the 15% SDLT charge (see above).
Property owners liable to the charge will be required to self-assess by filing an annual charge tax return, providing the address, the Land Registry title, the interest held, the beneficial owners and their addresses, the self-valuation, the band applicable and the amount due.
The due date for filing the return and payment will be 15 days after the commencement of the period of account, i.e. by 15 April each year.
The property owner may also be required to provide a professional valuation report and HMRC will offer a pre-return valuation checking service where the value is close to £2m.
As the first period of account will begin before Royal Assent is given to Finance Bill 2013, the first return and payment will be due by 1 October 2013.
The charge will be pro-rated where it is not applicable for the whole year. As the payment is made at the start of the year, a repayment will be made if the property ceases to be owned by the non-natural person part way through the year.
From 6 April 2013 CGT will be charged on gains realised on the disposal of UK residential property owned by non-UK resident ‘non-natural persons’, where the amount or value of the consideration exceeds £2m. The definition of a ‘non-natural person’ will be the same as for the 15% SDLT charge – in a change from the previous proposals, it will not include trusts.
The CGT charge will apply to a disposal, part disposal or a grant of an option over such property. It will not apply to indirect interests in UK residential property such as shares in property owning companies – again a change from the previous proposals.
The charge will only apply to the gain which accrues after 5 April 2013, providing a rebasing of the asset. This is similar to the rebasing election which offshore trusts could make in 2008, and experience of this demonstrates the importance of having formal valuations undertaken.
Any losses arising will be ring-fenced so that they are only available for offset against gains arising on the disposal of other residential properties.
Gains will be taxed at the current CGT higher rate of 28%. A marginal relief will apply where disposal proceeds are only slightly above £2m to prevent a ‘cliff edge’. No indexation will be available, and there will be no private residence relief.
Companies which are already subject to corporation tax will continue to pay corporation tax on the gain. HM Treasury are considering whether they should instead pay CGT so that all disposals of residential property are taxed at the same rate.
Partnerships will be transparent for the purposes of CGT. If a partnership sells residential property for more than £2m, corporate partners will be subject to capital gains tax even if the corporate partner’s share of the proceeds may be less than £2m. As individuals and trustees will not be subject to CGT, some families may wish to hold residential property in a family limited partnership – the inheritance tax consequences of this structure would also need to be considered.
It may be difficult to unwind existing structures, and the costs of doing so will need to be weighed against the ongoing costs of maintaining the structure. Costs of unwinding may include:
There is no relief in the new rules for unwinding existing structures.
If existing structures are retained, there may be other tax consequences. Many residential properties are held in ‘dry’ structures which hold no funds to pay the annual charge. If funds are provided by a shareholder or beneficiary of a trust, this may trigger other anti-avoidance rules as the individual may become a settlor or a transferor in relation to the structure.
Robert Langston, senior tax manager, Saffery Champness
