The last UK budget in March 2012 announced an intention to introduce a charge to capital gains tax as well as an annual charge on high value residential properties. These changes are only proposals at the moment and draft legislation following recent consultation has yet to be issued.
Purpose of the changes:
The reason given for these proposals was to stop a practice to what is known as “enveloping” which is to put properties in companies so that the shares could later on be sold without a charge to stamp duty land tax.
This is generally considered a spurious reasoning by professional accountants and tax advisors as there have historically only been limited numbers of sales of companies to our and similar advisors knowledge. The uncertain history and unquantifiable risk with acquiring shares in second hand companies makes such sales practically very difficult to achieve.
Some press coverage has suggested that this charge is being introduced as a means to bring in an effective council tax on higher value property but without having to extend the existing council tax bands which would otherwise be politically difficult to achieve.
The change to capital gains tax is suggested as being to bring equal treatment between non-residents and residents of the UK. This is a staggering change given the importance of foreign investment to the UK economy which has always been heavily influenced by the knowledge that capital gains tax is not levied in the UK on most foreign investors. The impact of this change will not be known for some time and investment portfolios need to be reviewed given the risk that this change could destabilise the already fragile UK property market.
This is the most significant issue, apart from the increase in the rate of stamp duty land tax on certain residential properties acquired by non-natural persons (generally companies) to 15% which was also introduced in the last budget.
The annual charge has been proposed at:
a) £15,000 for a residential property worth between £3 and £5m.
b) £35,000 for a residential property worth between £5m and £10m,
c) £70,000 for a residential property worth between £10m and £20m
d) £140,000 for a residential property worth over £20m
A tax return submission will have to be made to HM Revenue & Customs each year in relation to the property by its owner in order that the charge can be paid at the correct rate. The practical impact of this tax return requirement is unknown at this stage.
Capital Gains Tax
UK capital gains tax has been proposed to be extended to non-UK resident owners of UK residential property worth over £2m. This is a significant change and it is intended to apply to any sales of properties after the new rules come in. This means that any sales of high value residential property will be subject to UK capital gains tax after this change is introduced.
This change will therefore be restrospective in nature as properties which are currently worth far more than they were bought for will be subject to this tax charge when the property is eventually sold and with reference to capital gains accrued prior to the introduction of this new rule.
Capital gains tax has also been proposed to apply to shares in companies which derive the greater part of their value from residential property. This will be extremely complex and of unknown application. It will mean that any transfers of shares in companies holding UK property will have to be monitored very carefully to ensure that no unexpected UK tax charges arise on such transfers.
Commerical Property carve out
None of these charges are to apply to commercial property which means that the tax situation will be far better for commercial and not domestic use property. The impact of these changes on the property market is as yet unkown. It is also unknown whether in time that these changes will also be extended to commercial properties.
The UK has updated its tax system for non-UK domiciled individuals significantly over the last number of years. Back in 2008 the non-domicile system was significantly updated and has led to extremely complex rules as well as the annual remittance basis charge. This charge was originally introduced at an annual figure of £30,000 which was increased to £50,000 as of April 2012 (albeit for longer term residents).
A significant change in 2008 was that UK resident individuals who hold shares in offshore companies holding UK property were brought into the charge to capital gains tax in the UK on any sale of those assets by the offshore company. This change was retrospective in nature in that any profits accruing before the change are caught by the change. In many cases private residences were bought in these simple structures which if they had been bought personally would not have been subject to capital gains tax. The impact of these changes is still being felt today and will also interact with these latest changes.
The proposed introduction of the annual high value charge as well as extending capital gains tax will again impact on the non-domicile community particularly heavily. Some will find that they have to pay both the remittance basis charge and the new annual high value charge. Others will find that the introduction of the capital gains tax charge makes the payment of the annual remittance basis charge of limited benefit.
We recommend the review of all structures where UK property is owned given the likelihood that the structure will be subject to potential review by HM Revenue & Customs in relation to these new high value annual charge tax returns.
We also suggest that any transfers of shares in companies holding UK property are reviewed beforehand and monitored very carefully to ensure that no unexpected UK tax charges arise on such transfers.
What is regarded as residential does not necessarily coincide with normal understanding and so we also recommend reviewing whether properties are residential or commercial for these purposes.
Given the disparity between treatment of residential and commercial property whether investment into property should be changed to commercial only from now on. At a minimum investment portfolios need to be reviewed given the risk that this change could de-stabilise the already fragile UK property market.
We will be keeping the development of these rules under review.