Ownership of UK Property
The 2012 Budget saw the introduction of the new Stamp Duty Land Tax (SDLT) charge of 15% (effective from 21 March 2012) where a property is purchased by a ‘non-natural’ person (such as a company, collective investment scheme and partnerships with a corporate partner) and the value of the property exceeds £2 million.
Further, HMRC has released its consultation paper on the proposed changes to the taxation of UK residential property held by ‘non-natural’ person.
The increased SDLT rates have already taken effect, and the May consultation paper focuses on the second and third limbs of the three-pronged attack, namely:
• Annual charge (effective from April 2013)
• Capital Gains Tax (CGT) on the disposal of ‘assets (of whatever form) that represent directly or indirectly relevant UK residential property’ (effective from April 2013).
15% Stamp Duty Land Tax
The rate of SDLT payable on the acquisition of residential properties with a value exceeding £2 million increased from 5% to 7% with effect from 22 March 2012, for purchasers who are individuals. Where such properties are purchased by a ‘non-natural person’ the SDLT rate is 15%. The definition of a ‘non- natural’ person includes both UK and foreign tax residents. Trustees are specifically excluded from the definition of ‘non-natural’ person for SDLT purposes. There will also be an exclusion for ‘bone fide’ property developers provided they have been operating for at least 2 years and the property was purchased with the intention of redevelopment and resale.
Annual Charge
HMRC are currently consulting (which is expected to run until 23 August 2012) on the introduction of an annual charge to take effect from 6 April 2013. Residential properties worth more than £2 million will be subject to the annual charge where that property is held by a ‘non-natural’ person. For this purpose, the ‘non-natural’ person is the same as the SDLT definition above. The proposed charge will be as follows:
A Return will be required to be completed and will be due on 15 April each year and the tax will be payable at that time. The Return will include details of the value of each property, the address, Land Registry title, interest held and details of the beneficial owners.
The value of each property will be self-assessed based on the April 2012 value and must be re-valued every 5 years. HMRC will be offering a valuation check service.
Capital Gains Tax (CGT)
A non-resident ‘non-natural’ person holding UK residential property will be subject to CGT on properties with a value exceeding £2 million. For CGT purposes, the definition of ‘non-natural’ person is different to that for SDLT and the annual charge and will include:
• Companies
• Trustees
• Collective Investment Schemes
• Clubs and associations
• Personal representatives
• Entities that exist in other jurisdictions that allow property to be held indirectly
The charge will apply to:
• Commercially let residential property; and
• Property owned by an employer to provide accommodation to its employees
• The sale of shares in a company where more than 50% of its value is derived from the UK residential property
The applicable rate of CGT will be announced in the next budget and will not necessary be in line with the general rate of CGT.
Conclusion
The Government has stated that the purpose of the reform is to “encourage individuals who have put such high value property into envelopes for reasons including tax avoidance to take them out”. The Government is also aiming for a more equal treatment of residents and non-residents and ensuring that where a property is de-enveloped, the non-resident does not have an advantage from a financial perspective by avoiding SDLT and the annual charge. However, the CGT rules have not been extended to non UK resident individuals holding UK property.
The consultation period runs until 23 August 2012 and the Government will issue its response and publish draft legislation in Autumn 2012. The legislation will take effect from 6 April 2013.