Gabelle Tax Analysis: New guidance on the taxation of residential property

New guidance on the taxation of residential property

The UK Government has released details of the new taxes on ‘non-natural’ persons holding high value residential property.

The original consultation document was published on 31 May 2012. It focused on two key areas:

  • An Annual Residential Property Tax on residential properties valued over £2 million owned by certain ‘non-natural’ persons; and
  • The extension of Capital Gains Tax (CGT) to the disposal by certain non-resident ‘non-natural’ persons of residential property (or interest in such property or ‘envelopes’ holding such property) for properties worth more than £2 million.

Non-natural persons acquiring properties over £2 million are also subject to a 15% SDLT rate following Finance Act 2012.

The consultation closed on 23 August and since then we have been eagerly awaiting the draft legislation. Now that the draft legislation has been released (at least in part), time is of the essence for those that want to restructure before the 1 April 2013 deadline.

Annual Residential Property Tax (ARPT)

Who will the charge apply to?

The ARPT will apply to ‘non-natural’ persons. A non-natural person is defined as:

  • A company;
  • A collective investment vehicle; or
  • A partnership, one or more of whose members is either a company or a collective investment vehicle.

Trusts are specifically excluded as non-natural persons for the purpose of this charge.

Following consultation a series of reliefs may be available to exclude genuine businesses carrying on genuine commercial activity. This includes relief for:

  • Property development businesses
  • Property rental businesses
  • Property trading businesses
  • Properties held to provide employee accommodation
  • Properties owned by charities for charitable purposes
  • Properties which are run as a business and are open to the public with access to the interior for at least 28 days per year on a commercial basis
  • Certain farmhouses.

Relief will not be available where (except in the case of the last two bullet points) the property is occupied or kept for the occupation by any person connected with the owner of the property. Connected for this purpose is defined broadly and includes, for example, the child or other relative of the settlor of a trust which holds the property through a company.

The earlier requirement that a trade of developing a residential property must have a two year track record has been removed.

Tax charged

The amount of the charge will vary depending on the value of the property based on a banding structure.


 

Property Value

 

ARPT 2012-13

£2m - £5m

£15,000

£5m - £10m

£35,000

£10m - £20m

£70,000

£20m+

£140,000

 

The amount of the ARPT will increase every year on an index linked basis. The bands will not be adjusted for inflation. Residential properties will need to be valued every five years starting from 1 April 2012.

Capital Gains Tax

The Government is also extending the scope of Capital Gains Tax (CGT) so that it will apply to the direct or indirect disposal of high value residential property by non-natural persons.

Who will the charge apply to?

The definition of non-natural person for this purpose has been amended so that it will now be the same as the definition for the purposes of the ARPT i.e. the charge will apply to the following:

  • A company;
  • A collective investment vehicle; or
  • A partnership, one or more of whose members is either a company or a collective investment vehicle.

The reliefs which apply to the ARPT will also apply to the CGT charge.

This means that a trust holding property directly (i.e. not through a company) should no longer be caught by the new rules. This is a very welcome amendment as it provides further planning opportunities for property holding structures.

The Government is still deciding whether the CGT charge on residential property should extend to non-natural persons resident in the UK.

Tax charged

A key change is that the charge will now only apply to the part of the gain that accrues from 6 April 2013. This effectively provides rebasing for existing structures. It has also been announced that the applicable rate of CGT will be 28% subject to a’ tapering relief’ where the property is just over the £2 million mark. This tapering relief should prevent distortions in the property market for properties worth marginally more than £2 million.

SDLT

Non-natural persons are also subject to a 15% SDLT rate following Finance Act 2012. These rules will now be amended so that relief is available to exclude genuine businesses carrying on a genuine commercial activity (see above). This should enable genuine property businesses (such as rental businesses, property development businesses and property trading businesses) to exclude residential property they purchase for their business from the higher rate of SDLT. They would instead be subject to the 7% rate.

Conclusion

The intention of these measures is to “encourage individuals who have put such high value property into envelopes for reasons including tax avoidance to take them out”.Following the recent announcements, those who initially thought they were within the scope of the new property tax charges, may now qualify for one or more of the exemptions. Those structures that are still caught should consider whether they should restructure before the 1 April 2013 deadline.

Paul Bramall is a Partner at Gabelle LLP. He can be contacted at paul.bramall@gabelletax.com or via TaxDesk on 0845 4900 509.

Priya Dutta is a Senior Tax Consultant at Gabelle LLP. She can be contacted at priya.dutta@gabelletax.com or via TaxDesk on 0845 4900 509.