An annual tax on property has been the topic of discussion since a mansion tax was first mooted by Vince Cable and an annual charge on residential properties held by corporate entities was proposed by George Osborne.
The uncertainty provoked by the proposals has prompted overseas investors to delay acquisitions until the proposals are clarified and to look at existing ownership structures. In his Autumn Statement George Osborne confirmed that there would be no general “mansion tax”. He also confirmed, however, that an annual residential property tax (ARPT) would be introduced in the Finance Bill 2013.
One of the main driving forces behind the proposals was to clamp down on wealthy foreign investors investing in the UK property market through offshore corporate structures, a device often referred to as “corporate enveloping”. Purchasing property through a corporate enveloping structure could avoid triggering liability for the payment of stamp duty land tax (SDLT) on a future sale: a transfer of the actual property would trigger a substantial SDLT liability for a purchaser, while a sale of shares in an overseas company would not.
The Finance Bill 2012 and the draft Finance Bill 2013 introduced measures by the Treasury to discourage the use of “enveloping structures” to buy UK residential property.
Three significant changes have been introduced:
SDLT – The Finance Bill 2012 increased the rate of SDLT for residential properties over £2 million bought by certain non-natural persons (NNPs) to a new top rate of 15%. The new rate took effect from 21 March 2012 and applies to purchases by companies, collective investment schemes and partnerships in which an NNP is a partner.
ARPT – The draft Finance Bill 2013 stems from the legislation of 11 December 2012. It sets out details of the ARPT, an annual charge which will take effect from 1 April 2013 on residential properties held by an NNP worth over £2 million. The table below sets out the annual charge on the value of such properties.
CGT – It is proposed to extend the scope of capital gains tax (CGT) to cover gains on disposals by an NNP of UK residential properties and shares or interests in UK residential property. The draft legislation extending CGT to foreign companies will not be published until later in January 2013.
The draft legislation introducing ARPT sets out a number of reliefs designed to exempt genuine commercial activity from its provisions, including properties acquired in the course of property development where this is conducted as a trade. It also contains detailed rules on market value, ownership conditions, fragmentation of interests, chargeable days and the date of acquisition and disposal.
The introduction of the new charges targets NNPs and does not extend to properties held by individuals. For many, the most obvious solution would therefore seem to be to transfer property into their personal names. That said, unravelling corporate ownership gives rise to potential tax liabilities, the impact of which need to be carefully considered. Further, the driving force for holding properties in offshore structures has in many instances been a desire to preserve anonymity and to avoid paying inheritance tax. Those who wish to preserve their anonymity will, from now on, do so at a cost. Residential property owners will have to decide whether to retain the anonymity of a corporate structure and to pay the tax outlined above or to transfer the property into their own name (or some other structure that is not classed as an NNP, if that can be devised), with the attendant tax liabilities that will arise from such a transfer.
Tax transparency is and will continue to be a priority for the Chancellor. Tax has been at the forefront of media attention in recent months, with the Government under increasing pressure to clamp down on tax avoidance in the UK. Starbucks, Amazon and Google have all faced severe scrutiny by the Public Accounts Committee and their tax arrangements labelled immoral, even though they have acted within the law and existing rules.
It remains to be seen whether the proposed changes will discourage foreign investment in high-value UK residential properties, or whether the perceived attractions of UK residential property outweigh the additional tax costs of ownership.
Adrian Nelson and Gurpreet Sanghera
Simkins’ early warning bulletins are for general guidance only. Legal advice should be sought before taking action in relation to specific matters. Where reference is made to Court decisions facts referred to are those reported as found by the Court. Please note that past bulletins included in the Archive have not been updated by any subsequent changes in statute or case law.