Annual Charge and Capital Gains Tax on High Value Residential Property
David Anderson solicitor advocate and tax adviser and Andinee Pillay Jagambrun trainee solicitor both 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.
In the Budget 2012, the Government announced that it would be introducing measures to tackle tax avoidance and to ensure individuals and companies pay a fair share of tax on residential property transactions. In particular, it announced its intention to extend Capital Gains Tax (CGT) to disposals by certain non-resident non-natural persons (broadly offshore companies and trusts) owning residential property and to introduce an annual charge on high value residential properties owned by certain “non-natural” persons.
These measures are now under consultation and may come into effect as early as the next tax year. The aim of the consultation is to explore the proposed measures and invite comment. The consultation closed on 23 August, and the Government is now considering the responses. It is likely that further information will be provided in the Autumn Statement and draft legislation will be published and introduced in Finance Bill 2013.
The Government says the aim of this charge is both to deter avoidance and to ensure that the owners of high value residential properties pay their fair share of tax.
The proposed annual charge will apply to the ownership of interests in residential property by certain non-natural persons where the interest is valued over £2M on the relevant valuation date. The terms and definitions of non-natural person and residential property will be the same as that for the 15% rate of SDLT.
A company owning land solely in its capacity as a trustee (other than of a bare trust) is excluded from the 15% rate of SDLT and will, therefore, also be excluded from the annual charge. This is likely to be a useful exemption. Charities and bono fide property development businesses are also excluded provided, in the case of the latter,they meet the following conditions:
- The property is acquired as part of a bona fide property development business; and
- The business has been operating for a minimum of 2 years; and
- The property was purchased with the intention of re-development and re-sale.
There are concerns that the above conditions will penalise companies, partnerships and collective investment vehicles carrying on genuine residential property developments and property investment businesses. It may also deter new entrants to the market and affect competitiveness amongst property developers.
Freehold and leasehold interests owned by unconnected persons will be valued separately and the annual charge will only be payable where the individual interest is valued at £2M or more.
Property valuations for the charge will be self-assessed by the persons liable to the charge. The valuation date has been set at 1 April 2012, and the value will be relevant for the charge for five years, i.e. the property will not need to be re-valued until 1 April 2017. Although there is no requirement for the valuation to have been completed by a suitably qualified valuer of real estate, a valuation prepared by professionals may protect taxpayers from possible penalties should HMRC challenge the value of the property and prove that the property was significantly undervalued.
It has been proposed that the annual charge rates will be as follows:
|Property value||Annual Charge 2012-2013|
|£2M - £5M||£15,000|
|£5M - £10M||£35,000|
|£10M - £20M||£70,000|
The due date for the annual charge tax returns and for payment of the full annual charge will be 15 April of each year. However, the first period of account (1 April 2013 – 31 March 2014) will be on either 1 October 2013 or 30 days after the Royal Assent is given if that is after 1 September 2013.
HMRC will administer the new charge and carry out compliance activity to ensure that all relevant owners are assessed to the correct level of annual charge. Penalties will be imposed on those who have failed to make returns. HMRC will also have the power to challenge what appear to be unreasonable valuations of properties.
Capital Gains Tax
Currently, CGT is charged on UK residents only unless a non-resident is trading in the UK through a permanent establishment. Therefore, generally, if you are non UK resident at the time of disposals and incur a gain (subject to a five year “claw-back” rule and the split year rule) there is no CGT payable.
The extension of CGT will mean that gains made by non-UK resident non-natural persons (eg offshore companies and trusts) on disposals of UK residential property for more than £2 million will also be subject to UK CGT. It is anticipated that this will be the first step towards a CGT charge for all non-residents disposing of UK residential property, which is more in line with the position in other EU countries. The definition of residential property will have the same meaning used for the 15% SDLT rate. The definition of Non-natural persons will be extended to include:
- Companies and other bodies corporate;
- Personal Representatives;
- Clubs and associations; and
- Entities that exist in other jurisdictions that allow property to be held indirectly.
Charities will remain exempt from tax on their gains.
The extension of CGT will only apply to the disposal (or part disposal) of residential property where the consideration paid exceeds £2M and will include the grant of an option over the property. It is also proposed that it will apply to the gains that arise on the disposal of assets, which will include shares, interests or securities in a property-owning company where more than 50% of the value of the company is derived from UK residential property. It is not clear how HMRC will police this , particularly if shares in a single purpose property holding company are owned and disposed of offshore. The above is also subject to any double tax treaty which is relevant. Double tax treaties overrule UK domestic law and in some cases may provide that gains are only to be taxed in that other country and not in the UK. It is likely this area will be explored by tax advisers.
Gains will be calculated in the usual way taking into consideration any allowable deductions such as costs of acquisition and disposal. Any losses arising on the disposals will be available to offset against gains on disposals of UK residential properties only.
Gains made by non UK resident companies that are currently liable to corporation tax (due to them trading through a UK permanent establishment) will remain chargeable to corporation tax. Non UK resident companies that are not subject to corporation tax will have to pay CGT on any gains they make. Usually, there is an annual tax-free allowance which allows individuals to make a certain amount of gains each year before they have to pay tax. It is not clear whether companies will also be given any such tax free allowances.
Private residence relief (PRR) is usually only available on disposals by an individual. However, where a resident non-natural person (such as a trustee or personal representative) is eligible for PRR under the current CGT rules, then it is proposed that similar treatment will apply for the extended CGT rule as well.
The CGT rate will be confirmed by the Chancellor at Budget 2013, which is likely to be the same as the usual CGT rate. CGT will be paid the usual way, though the Self Assessed system. This raises questions of how HMRC will police the charge as enforcement against companies based in offshore jurisdictions is unlikely to be straightforward.
The new measures will only apply to residential properties worth £2M, and therefore, any residential properties below this threshold will be subject to the usual 5% SDLT on initial acquisition, and there will be no annual charge and no CGT on the disposal of the shares in the companies. Properties below the threshold may increase in value to fall within it.
The proposals may be subject to change after the consultation and there is considerable detail missing from the proposals particularly on implementation and enforcement.
There may be ways in which the purchase of high value UK property can be structured so as to mitigate the effect of the proposed changes.
If you would like further information on the content of the consultation, or if you would like advice on your position, please feel free to contact us.