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Changes to the Taxation of UK residential Properties

UK Government to introduce new tax charges for UK property held in corporate structures.

Since the publication of the consultation paper "Ensuring the fair taxation of residential property transactions" in March 2012 (which set out proposals for a new annual charge and capital gains tax charge on non-natural persons ('NNPs') holding high value residential property), NNPs have been awaiting the publication of the Finance Bill 2013 with some trepidation.


Thankfully, due to clarification and certain exemptions, both the annual charge and the capital gains tax charge are not as far reaching as originally feared.


Annual residential property tax ('ARPT')

The ARPT will be payable by NNPs who have a beneficial interest in a residential property worth

more than £2million.


Who will be liable?

Liability to the ARPT will be restricted to companies, collective investment schemes and partnerships which have a company as a partner, wherever they are resident. Trusts, whether onshore or offshore and whether or not they have personal or corporate trustees, will not have a liability to the ARPT. However, where is trust is going to be used care must be taken to ensure that the transaction is within the proposed General Anti Abuse Rule (see article dated 5/10/12 on GAAR).


A number of significant exemptions will apply to ensure that 'genuine businesses carrying out genuine commercial activity' are excluded from the charge.


Relief will be available for:


(a) Properties exploited in a property development, trading or rental businesses provided the property is not occupied by a 'non-qualifying person'.


The definition of 'non-qualifying person' is extremely wide and will include any beneficial owner person connected with them, including for example, the child or other relative of the settlor of a trust which holds residential property through a NNP.


The current requirement for a property development business to have been carried on for two years has been dropped for the ARPT.


(b) Properties exploited as part of a trade under which the property is available for use or enjoyment by the public at least 28 days a year on a commercial basis.


(c) Properties owned to provide employee accommodation.


(d) Properties held by charities for charitable purposes.


(e) Farmhouses, which are of a 'character appropriate' to the land being farmed and are occupied by farm workers and also certain other properties.


It’s important to note that although a relief may be available, it must be claimed each year. The first returns must be filed by 1 October 2013 with future returns needing to be filed by 30 April each year. Any charge due must be paid by 31 October in each year.


How much will they pay?

The rate of the ARPT is:


Taxable value of property
Annual chargeable amount
£2 million - £5 million £15,000
£5 million - £10 million £35,000
£10 million - £20 million £70,000
Greater than £20 million £140,000

The 'chargeable period' will run from 1 April to 30 March of each year and will not follow the tax year. Where the ARPT is applicable for part only of a chargeable period, the annual chargeable amount will be apportioned accordingly.


The ARPT will be index-linked (annually to the CPI), but the thresholds will remain constant in nominal terms. Residential properties will need to be valued every five years, with the first valuation point being 1 April 2012 to see which level of charge applies.


Capital gains tax

The new capital gains tax regime will apply to the disposal of a residential property for more than

£2 million on or after 6 April 2013.


Non-UK resident NNPs holding high value residential property will only come within the scope of the new capital gains tax charge if they fall within the scope of the ARPT, so that those non-UK resident NNPs who qualify for the reliefs set out above will not be subject to the capital gains tax charge.


This change ensures consistency between the two charges – a consistency that was lacking under the original proposals. In particular this will be welcome news for non-UK resident corporate trustees and also those who rent properties to third parties, who will now remain outside the scope of the capital gains tax charge where they hold high value residential property directly.


How much will they pay?


(a) Gains subject to the charge


In acknowledgement of the fact that non-UK resident NNPs have until now been outside the scope of UK capital gains tax, capital gains tax will only be payable on gains attributable to increases in value post 6 April 2013 as such, rebasing is available.


The mechanism for the rebasing and whether a formal application will have to be made to benefit from the rebasing should be clarified during the year.


(b) Rate of tax


The applicable rate of capital gains tax will be 28% with a 'tapering relief' available where the value of the property falls 'just over the £2 million threshold.


More Tax Vicar!

The proposed rate of tax payable by non-UK resident NNPs is above that currently paid by UK resident companies. The Government is therefore to consider whether to extend this capital gains tax charge to UK resident companies as well.


Stamp Duty Land Tax (SDLT)

When the consultation was announced in March 2012, the rate of SDLT on purchases of residential property by NNPs was increased to 15%. These rules will now also be amended to incorporate the same reliefs as will apply for the ARPT, so that the 7% rate will apply to persons who would not be subject to the APRT. Payment of the 7% rate will be conditional on the appropriate relief applying for three years following the purchase and the property not being occupied by a non-qualifying person in that time.


However, the amendments will only be effective from the date of Royal Assent of the Finance Bill 2013 (which is expected in June/July 2013) and so there will remain a period of time during which the existing rules will continue to apply.


Planning

NNPs may well need to take steps before then to ensure that they can complete any

restructuring before the new annual charge rules come into force on Monday 1 April 2013.

Some may now fall entirely outside the scope of the new charges and others may consider them an acceptable burden, particularly when the benefits of NNP structures from a privacy, inheritance tax and divorce perspective.


Where restructuring involves transferring the property back into individual ownership, potential Inheritance Tax charges can offset or reduced by taking out a whole of life assurance policy and placing it in a suitable trust.