The Government’s aim is to ensure that everyone pays their fair share of tax on residential property. While most people do pay their property taxes (and without them the Government could not begin to afford the public services on which the country depends) there are some who avoid paying their share. The Government is determined to address this.
Para 1.2 HM Treasury Consultation Document issued 29th May 2012
Following on from this year’s Budget, the Government has recently issued its draft consultation document setting out in further detail their proposals to tax UK residential property that is held through certain structured arrangements (i.e. not held personally by the individual in question).
At the moment, the document merely sets out the proposed changes which are open to discussion through to 23 August 2012 when the consultation period closes. We would then anticipate that draft legislation will be issued in the autumn statement with a view to forming part of the 2013 Finance Bill, hence going “live” in April 2013.
However, with the Government taking its usual blinkered view that anything other than personal ownership must be tax driven, we would not expect there to be (m)any material changes to these proposals – this is despite their recent U turns on the restriction of income tax relief on charitable giving and the proposed introduction of the now infamous “pasty” tax and caravan taxes.
With that in mind, anyone owning residential property with a market value in excess of £2m through a “structure” must review the suitability of that arrangement in the light of these proposals and if necessary take remedial action to reduce any adverse UK tax exposure that may result from April 2013.
With effect from 1 April 2013 Residential property held by a “non-natural” person will be subject to what is nothing more than an annual wealth tax – this will include property held through a corporate (UK or offshore), a partnership that includes a corporate and certain other vehicles including collective investment schemes. Interestingly, trustee ownership does not appear to be caught.
Property values will be self-assessed and taken as at April 2012 (or later if the property is acquired after that date) and revalued every 5 years. There does not appear to be a reduction in value where a mortgage is secured on the property.
The following bandings are being proposed:
|Property value||£2m to £5m||£5m to £10m||£10m to £20m||Above £20m|
Capital Gains Tax on future property disposals
Capital Gains Tax (“CGT”) is also to be extended with effect from 6 April 2013 so that any non-natural (as defined above) non-resident will become liable to tax on any capital gains realised on the sale of UK residential property.
This is a significant change from the rules that we currently have, where non-residents generally have no liability to UK CGT.
One important point to note is that offshore trustees will be classed as “non-natural” persons for the purpose of this charge (but not the annual charge above), although it should be possible for the trustees to claim the benefit of Principal Private Residence Relief (“PPR”) where a beneficiary occupies the property under the terms of the trust.
Where property is held by a company (irrespective of whether that company is owned by a trust or not) CGT will always be payable and therefore some element of restructure is likely to be needed here.
The above proposal has been further tightened by the inclusion of a CGT charge where a shareholding in a company is disposed of and more than 50% of the assets of that company are represented by UK residential property.
It is important to note here that any capital gain is based on the original base cost of the property within the structure. Where an existing property has been acquired through the purchase of an offshore company, further due diligence may well be required as any capital gain will not be based on what was paid for the company, but instead will be based on the price that the company originally paid. This could well lead to significant potential capital gains.
At the moment there does not appear to be any rebasing of property values to April 2012 and therefore there could be some significant potential CGT charges in store if and when a property is sold after April 2013.
For example, a property acquired through a BVI company (owned by a non-resident individual) in April 2005 for say £2m is now worth £5m. If the property (or the shares in the company) were sold in March 2013 there would not be a CGT liability based on these proposals. However if the sale were delayed to say May 2013 there would be CGT of £840,000 to pay.
Therefore care needs to be taken to effectively re-base the property so that any appreciation before April 2012 will be tax free. This may be quite tricky in practice, with there unlikely to be a “one fits all” solution – care will therefore need to be exercised to ensure that any restructure does indeed trigger a capital gain but at the same time also side-steps a stamp duty land tax charge.
What should I do?
The above proposals will have a significant impact on virtually all individuals that own UK residential property in excess of £2m through an offshore structure.
In that respect anyone with such a structure will need to be mindful of the potential impact and take advice accordingly.
There are still certain advantages that may be worth securing such as UK Inheritance tax being the primary one.
That said, it may well be possible to restructure existing structures to secure a CGT free uplift, without any corresponding SDLT charges and at the same time also secure a beneficial IHT treatment going forward.
We would not recommend any immediate changes to an existing structure.
Draft legislation will follow once the consultation window has closed and in that respect we would anticipate it being issued around the time of the autumn statement (expected to be 22 November 2012) – only then will we know with relative certainty what legislative changes will be introduced.
There will then be approximately 4 months to implement any changes, which in the vast majority of cases should be sufficient time. In the meantime, initial reviews ought to be undertaken and potential restructuring opportunities highlighted accordingly.