Changes to the taxation of UK residential properties
For many years it has been commonplace for non-UK residents to hold UK residential property through corporate structures. The advantages of this type of planning are mitigated UK inheritance tax liabilities and, more importantly for some, confidentiality.
The UK Government, in its efforts to further increase its tax take, has tackled this issue head on in the 2013 Finance Bill, which details how it intends to encourage the transfer of high value UK properties back into individual ownership and potentially subject the individual to UK inheritance tax.
The new rules apply to residential property valued at £2 million or more which is owned by a Non-Natural Person (NNP) unless a relief applies. An NNP is considered to be a company, a partnership with a corporate member or a collective investment scheme.
NNPs will be liable to a new Annual Tax on Enveloped Dwellings (ATED) and will also come within the scope of a new capital gains tax charge (if they are subject to the ATED). The rate of the ATED 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 ATED is applicable for part only of a chargeable period, the annual chargeable amount will be apportioned accordingly.
The ATED will also 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
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 ATED (subject to the reliefs covered below). In acknowledgement of the fact that 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.
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.
Stamp Duty Land Tax (SDLT)
In addition to ATED and CGT, purchases of high value properties will be subject to a 15% rate of SDLT unless reliefs apply in which case it is reduced to 7%. 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.
Reliefs
Reliefs are available to landlords who will rent to genuine third parties, property developers and others who use the property in a business. The effect of this is that the ATED and capital gain tax charge are likely only to apply to owner occupied residential properties worth more than £2million. Where the reliefs are available, a company structure may remain the most attractive option for most purchasers.
UK inheritance tax mitigation
For many foreign purchasers outright ownership will be attractive, but will give rise to UK inheritance tax exposure. However, this exposure to UK inheritance tax could be mitigated by borrowing secured by a mortgage which will depress the value of the property for example or; Where borrowing is not considered to be a viable option, a Whole of Life Assurance policy could be purchased and placed in suitable trust to offset the anticipated inheritance tax exposure.
Restructuring
If a high value residential property owned by an NNP falls within the scope of ATED and, therefore, the new capital gains tax charges, the structure should be reviewed to determine if it remains cost effective and, if not, whether steps should be taken to restructure.
