UK Budget 2012 - Eye watering 15% SDLT charge
By David Anderson, solicitor advocate and tax adviser, and Andinee Pillay Jagambrun, 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
Although there had been warnings that SDLT loopholes would be closed, no one expected the introduction of the 15% SDLT rate, which applies to residential properties purchased for more than £2,000,000 by companies. This charge will make the UK a much less attractive place for non-domiciled (and may be non UK resident) investors. Indeed, this exorbitant charge appears to be a contradictory move for a government geared up to open Britain for business. It may however be that the legislation which is eventually enacted will contain various useful exemptions from the 15% tax.
Furthermore, threats of retrospective tax legislation cause uncertainty for investors. The government has also announced its intention to introduce an annual charge on companies owning UK real estate and to charge non-UK companies CGT.
On or from 21 March 2012, there will be an SDLT charge of 15% where residential properties are acquired by certain types of "non-natural" persons. There will also be an increased SDLT charge from 5% to 7% where the property is purchased by an individual. Both these charges will apply where the price of the property exceeds £2,000,000. Otherwise, the old 5% rate will apply.
There are transitional rules in place for these transactions. Effectively companies which had exchanged contracts before 21 March 2012 would fall outside the 15% SDLT provided there is no variation/assignment etc of the contract before completion. For the old rate of 5% to apply to individual purchasers, they would have to have exchanged before 22 March.
Importantly the draft legislation which has recently appeared contains a useful exemption from the 15% SDLT charge for companies which will be worth buyers using offshore companies exploring further.
Whilst the definition of non-natural persons is wide enough to catch companies quoted on the London Stock Exchange (such as REITs), it does not cover some obscure overseas entities. In general however most UK and offshore companies incorporated in jurisdictions such as BVI and the Channel Islands will be caught. HMRC has retained powers to extend the number of non-natural persons caught by these provisions by statutory instrument. Furthermore, the chancellor has warned that the government will act swiftly to curb further SDLT abuse, with the use of retrospective legislation where appropriate.
There are no changes being made to the stamp duty tax rate of 0.5% which applies to purchase of shares in a UK Special Purpose Vehicle owning residential property (different rates (often nil) will apply to companies based in other jurisdictions). The government has however made several announcements for a consultation on the introduction of an annual charge where the residential property is owned by non-natural persons. This annual charge would be akin to a Wealth Tax levied in some continental countries on the net value of assets. This would be a negative development as it would require an annual return (probably self assessed) with a valuation of the property. It will be assessed on the gross value of the property.
The government has also said it will consult on introducing a Capital Gains Tax charge on non-UK non-natural persons which own residential property. At the moment offshore companies owning UK property are generally not liable to UK Capital Gains Tax. If this proposal is implemented it could affect prices in the UK as international buyers will lose a significant tax break. That said most other EU countries tax capital gains on land regardless of where the seller is resident.
Purchase of shares in an SPV
Currently, where a company owns property it may be possible for a prospective buyer to either extract the property from the company into its own name or acquire the company itself. Where the latter is concerned, there is no SDLT payable as the property does not change ownership but rather ownership of the company changes. Accordingly, the purchase is subject to lower, or no, stamp duty as the purchaser is effectively buying the shares in the company.
Although there are no proposals to change the tax rate on purchases of shares in an SPV, there are proposals to introduce an annual charge on companies owning residential property. This charge will only apply to properties worth more than £2,000,000.
This new charge, if implemented, will have a significant impact on individuals who own their property through a corporate vehicle. Owners will need to assess whether the benefits of owning property via a company (confidentiality, inheritance tax) are justified by the increased taxation during ownership and on disposal. Alternative, unfamiliar structures may need to be considered for holding their UK assets.
Presently, non UK residents (including companies) are not subject to CGT. This is subject to certain rules, including a five year "claw-back" rule and the split year rule. However, the government has announced its proposal to introduce a charge to CGT to non UK non-natural persons on gains realised on disposals of UK real estate. The consultation is due to take place this year with a change of the law to come into effect in the 2013-14 tax year.
Most countries which charge CGT will provide that real estate in that country is subject to CGT at national level irrespective of the owner's residence status. The UK has been one of the few countries which did not provide for this. This was positive and attractive to the non UK resident investors. Certainly, non UK residents would have been advised to purchase UK real estate using offshore companies to fall outside the UK IHT. These individuals will find themselves in difficulty if the change is implemented as they will find that any gains made on the disposal of UK real estate worth more than £2,000,000 will be subject to UK CGT.
The proposal, at present, does not include non UK resident individuals, who will continue to be outside the scope of UK CGT. Advisers will now be considering the UK's network of double tax treaties to determine whether there are provisions which might override this proposed charge.
Whilst it is true that companies (mainly offshore) owning UK residential property have been used by non UK domiciled to remove themselves from the scope of UK IHT, many individuals have also used these structure for security and confidentiality reasons.
The announcement to increase the SDLT to 15% for companies appears to be rushed. Furthermore, the government seems to have disregarded the fact that SDLT is payable on the initial purchase of the property by a non-natural person. It is the subsequent sale of the shares in the SPV that falls outside the scope of SDLT and into the remits of a lower stamp duty rate.
People who have purchased UK property using an offshore vehicle should keep a close eye on the proposed consultations and ensure any new rules implemented do not catch them off-guard. The draft legislation which has recently appeared contains a useful exemption from the 15% SDLT charge for companies which will be worth buyers using offshore companies exploring further.