Taxation of High Value Residential Property
The Finance Bill 2013 was published just before Christmas containing legislation to give effect to the new tax charge for high value UK residential properties owned by Non Natural Persons (NNP’s).
We summarised in our previous blog the key changes in respect of the Annual Property Charge (ARPT), Stamp Duty Land Tax (SDLT) and the Capital Gains Tax (CGT) charges to be brought into effect as of April 2013. This note highlights some key changes set forth in the draft Finance Bill and clarification on the CGT position on the disposal of such properties.
Summary of the new measures
Draft legislation contains significant changes to the 3 charges (ARPT, SDLT and CGT) as follows:
- The proposal to treat trusts as NNP’s has been dropped and as a result trusts and offshore trusts will not be within any of the three charges – 15% SDLT, ARPT or the new CGT (28%) charge. However, due to a company being defined as an NNP a review of trust/company structures will need to be considered and whether to unwind the company prior to the new changes (in April) would be appropriate. Simple direct trust ownership can still be an effective planning tool in appropriate circumstances.
- The draft legislation offers generous reliefs from the 15% SDLT rate (the current 7% rate remains applicable) , ARPT and CGT for properties held by NNP’s for the following purposes:
- Property development business (this includes redevelopment and resale as part of the course of trade);
- Property rental business. Relief only applies where the property is not occupied by a ‘non-qualifying person’ i.e., an individual who owns the company (or settlor of the trust which owns the company), their spouse, their relatives or the relatives of their spouse;
- Similarly, for the exemption from the 15% SDLT the property must not be occupied by a non-qualifying person for three years following the purchase;
- -Property trading business;
- -Employee accommodation (where employees hold less than 5% of the company).
- -Farmhouses occupied by farmers for the purposes of a farming business;
- -Properties open to the general public at least 28 days a year; or
- -Charity owned properties
The exemptions are designed to assist inward investment and genuine businesses carrying out commercial business activity. It is important for anyone who thinks they may qualify for the reliefs to review whether they fall within the wide scope of what is meant by ‘connected persons’. Further, in order for such reliefs to apply a claim must be made to HMRC. Any changes of use must also be reported.
- Where these exemptions do not apply, any gain on the disposal will be calculated by reference to the gain arising from 6 April 2013 and the CGT rate will be 28%. This is welcome news for those who have already held a high value residential property through an NNP for a considerable amount of time. The re-basing election allows for the CGT charge to only apply to gains accruing from 6 April 2013.
- Initially, the government suggested that the CGT charge will not apply to UK companies, however the draft legislation proposes that the 28% CGT charge will now apply to companies which make disposals of such properties (corporation tax on capital gains is currently at 24% and will fall to 21% by 2014/15). However, it is likely that in most circumstances the companies will qualify for one of the reliefs such that any gain will remain within the charge to corporation tax.
- The ARPT will come into force from 1 April 2013 and the rates remain unchanged as follows:
The ARPT is calculated by reference to the value of the property at 1 April 2012, therefore, a valuation will be needed on 1 April 2012 to establish which charging band applies to the property and properties will need to be valued every 5 years beginning on 1 April 2012. Where a property qualifies for relief from the ARPT the charge will be pro-rated.
For the purposes of re-basing the value at 1 April 2013, a professional valuation will also be appropriate at this date for evidence of the base cost on eventual sale.
Property holding structures involving Non Natural Persons will need to be reviewed in order to assess the impact of the new measures and consider whether the dismantling of such structures would be appropriate.
It may not necessarily be the best approach to collapse such structures and consideration will need to be made for the reasons the structure was established in the first instance, for example protection from inheritance tax or privacy. Therefore each case will need to be approached based on its own facts.
Many of the key changes above are welcome and opportunity to preserve the scope for planning involving direct trust ownership remains in appropriate circumstances.
For help and advice relating to the upcoming changes and how this may impact your particular circumstances please contact either Sara Shahran (London) or Jason Gyamerah (Zurich).