22 March 2013
Taxation of High Value Residential Property
The Budget on 20th March 2013 did not include any significant changes to the new tax charges in respect of UK residential properties worth more than £2 m, with the exception of renaming the Annual Residential Property Tax (“ARPT”) to the Annual Tax on Enveloped Dwellings (“ATED”).
The new rules as confirmed in the Budget on 22nd March 2013 are as follows:
- Increased SDLT rates with immediate effect.
- An “ATED” on “high value” properties held by “non-natural persons”.
- A proposal that Capital Gains Tax would be applied to certain non residents.
Draft legislation in respect of the extension of Capital Gains Tax was issued in late January 2013. For full details, please see our updated commentary entitled “Draft Legislation for the Extension of CGT to Non Natural Persons”.
1. SDLT changes
|Residential Property Value||SDLT Rate|
|Less than £125,000||0%|
|£125,001 – £250,000||1%|
|£250,001 – £500,000||3%|
|£500,001 – £1,000,000||4%|
|£1,000,001 – £2,000,000||5%|
|£2,000,001+ purchased by individuals||7% from 22nd March 2012|
|£2,000,000+ purchased by non-natural persons||15% from 21st March 2012|
The rates above are chargeable on residential property, that is, “a building that is used or suitable for use as a dwelling, or is in the process of being constructed or adapted for such use”. However, the 7% and 15% rates do not apply to non-residential or mixed use properties. Furthermore, these rates are not applicable if 6 or more dwellings are the subject of a single transaction.
Non-natural persons (“NNPs”) to which the 15% applies, are companies, UK and non-UK partnerships with a corporate member, or collective investment scheme. Corporate trustees are exempt from the 15% charge if they are purchasing the property directly. Nominees and bare trusts are also exempt.
The draft legislation gives much broader relief (but with effect from the date of Royal Assent) to property related businesses than originally anticipated. NNPs engaged in the business (carried on with a view to a profit) of letting, trading in, or redeveloping properties will not be subject to the 15% rate on purchases after the date of Royal Assent. This relief is not available if certain individuals connected to the NNP occupy the dwelling.
There are also reliefs available for property used in a qualifying trade, or where it is provided to certain employees (including farmhouses) but there are requirements for public access to the property if used in a trade, and ownership and employment requirements for the employee accommodation reliefs. Again the relief is only available on purchases after Royal Assent.
If relief for the higher rate of SDLT was claimed, it may, in certain circumstances be withdrawn if the relevant conditions fail to be met within the three years following the acquisition of the interest. The balance of the SDLT is then payable along with interest but no penalties will be charged.
If none of the reliefs are available, the use of NNPs may still be useful for certain clients if they act as nominee or bare trustee. This option may be of interest to clients who prefer personal ownership, but require a nominee for reasons of confidentiality.
2. Annual Tax on Enveloped Dwellings (“ATED”)
The ATED is applicable to property ownership situations where the following three conditions are met:
- a company, partnership or collective investment scheme is beneficially entitled to the interest in the property
- The interest is a “single-dwelling interest” and
- The interest has a taxable value greater than £2 m.
This is an annual tax charge calculated by reference to chargeable periods commencing 1st April 2013 and ending on 31st March 2014 and annually thereafter.
The annual tax charge is as follows:
|Taxable value of the interest in property||Annual chargeable amount|
|£2,000,001 – £5,000,000||£15,000|
|£5,000,001 – £10,000,000||£35,000|
|£10,000,001 – £20,000,000||£70,000|
The taxable value is the market value at the date of acquisition or if later on the 1st April 2012, and thereafter the market value every 5 years from 1st April 2012.
The annual chargeable amount is pro-rated if the charge is not applicable for the entire chargeable period.
The person liable for the tax is the company, the “responsible partners” or the trustee of the collective investment scheme. Liability of partners is joint and several and joint owners of a single interest dwelling are jointly and severally liable.
The draft clauses include provisions for various reliefs. They are intended to mirror the SDLT provisions detailed above, so if a taxpayer is within the 15% rate of SDLT on the property acquisition then they are likely to be within the scope of ATED, and conversely if they are not within the 15% rate by virtue of one of the reliefs, then they are unlikely to be within the scope of ATED. It is imperative however that in order to be eligible for the ATED relief, the person who holds the interest must also carry on the business. Importantly however, the reliefs are operative from 1st April 2013.
ATED returns must be submitted within 30 days of the beginning of the chargeable period, i.e. usually by 30th April. This is also the date on which the ATED must be paid, although for the first year, there is a 6 month extension to 30th October 2013.
Note that this return is completed at the beginning of each chargeable period and so if a taxpayer has claimed relief (in advance) but circumstances change such that the relief ceases to be available to him, the taxpayer is required to amend the ATED return within 90 days of this occurrence.
What this means for our clients
Each circumstance is going to be different and so there is no one easy answer. Professional advice should be sought in every situation.
Broadly speaking, if the IHT protection garnered from the offshore company owning the property is of more value than the likely future ATEDs, retaining the structure may be prudent. However, you may wish to consider whether other IHT planning methods, such as life insurance would be cheaper than funding the ATED. Note that the suggestion that there may be a limit to the deductibility of loans means using debt as an IHT planning tool is currently not advisable.
If the structure holding the property now falls within one of the exemptions, or, if you can rearrange matters so that it does fall within the exemptions, this may be a sensible course of action. e.g. if a beneficiary is living in a trust property, consider bringing this arrangement to an end, and letting the property commercially to an unconnected person.
If you are contemplating purchasing a new property, generally speaking, personal ownership for personal occupation by an individual with some IHT planning is likely to be the simplest and cheapest option for most. A bare trust or nominee company may be included for anonymity. Alternatively, purchase by corporate trustees will not only provide anonymity but also may provide an element of wealth protection. The IHT exposure can be managed in other ways.
Finally, if the property is to be let out, then a corporate structure may be the preferred route, providing that the lettings relief exemption is fully available. Such a structure may benefit from delaying the purchase until after Royal Assent to access all the available reliefs.
It must be borne in mind that the matters referred to above are based on draft legislation which can change as it progresses through Parliament.
|Mark Davies||Fiona McClafferty|
|+ 44 (0) 20 3008 8102||+44(0)20 3008 8105|
This bulletin is intended to provide general information only and is not intended to constitute legal, accounting, tax, investment, consulting, or other professional advice or services. Before making any decision or taking any action which may affect your tax or financial position, you should consult a qualified professional adviser.