The Government has stated that the new provisions are intended to encourage investors to unwind offshore structures holding UK residential property.
The key changes, which apply to residential properties valued at over £2m, are:
- an increased rate of stamp duty land tax (‘SDLT’) of 7% - this is effective already;
- a new 15% rate of SDLT on the acquisition of properties bought by “non-natural persons”, whether onshore or offshore - this is also already effective;
- the proposed introduction (from 6 April 2013) of a charge to capital gains tax (‘CGT’) on disposals of properties by non-UK resident “non-natural persons” (rate to be determined in the 2013 Budget);
- the proposed introduction (from 6 April 2013) of a new CGT charge on the disposal of shares in companies, or other assets, which derive more than 50% of their value directly or indirectly from UK residential property (announced in the consultation document); and
- the proposed introduction (from 6 April 2013) of an annual charge on properties owned by “non-natural persons” (UK or non-UK) - excluding trustees
Existing property holding structures
UK residential property is held through non-UK resident companies (directly or via a trust) for a number of reasons:
- rental income is taxed at 20%;
- the company shields non-UK domiciled (and not deemed domiciled) individuals against UK inheritance tax (‘IHT’) on the property;
- no SDLT is payable on the purchase of shares of a non-UK resident company;
- the disposal of the property by the company should be free of CGT;
- confidentiality, as the company not the individual is listed as the owner at the Land Registry (even if only a nominee); and
- limited liability, and structuring advantages.
None of the above has changed, except for the CGT free disposal. The new provisions mean that from 6 April 2013 gains realised when the company sells the property (for more than £2m) are subject to a new CGT charge.
In addition, if the property is worth £2m or more, there would be a new annual charge based on the value of the property, although that does not apply to non-UK resident trustees (or foundations).
There may also be a new CGT charge on a disposal of the shares in the company holding the UK property, although the terms of this charge are yet to be clarified. Therefore careful consideration will be needed where planning relies on retention of a property holding company in the longer term.
Note that where property is disposed of by:
- non-UK resident individuals; or
- UK resident individuals in occupation of the property as their main residence (and so benefitting from Principal Private Residence relief) no CGT should arise under the current or proposed provisions. As a result of these new provisions, many property holding structures will need to be carefully reviewed.
New UK residential property purchases
Specialist tax advice should be sought on any planned purchases of residential property in the UK, whether for investment or for personal use.
The new punitive 15% rate of SDLT only applies to new acquisitions of residential property worth in excess of £2m by non-natural persons and is intended to deter people from buying UK residential property through companies (UK or non-UK). Corporate (and individual) trustees are exempt from the 15% SDLT rate in most cases and so, like individual purchasers, will pay SDLT at the 7% rate.
Given the new 15% SDLT rate, annual charge and CGT exposure, corporate acquisitions will now be far less attractive, even though corporate ownership will still provide the benefit of income tax and IHT mitigation.
These new provisions (as intended by the proposals) can be avoided by purchasing in personal names. However, there are disadvantages:
- where the property is rented out, income tax is payable at a maximum rate of 50% (45% from 6 April 2013) on the net rental income; this can be reduced by interest paid on third party finance taken out to acquire the UK property;
- UK property held directly will be subject to UK IHT on death. This exposure can be mitigated by taking out borrowing secured against the property, or insurance;
- confidentiality would be lost, however it could be protected by purchasing the property through a nominee.
Other options for a new purchase include:
- a non-UK resident trust, which should not be subject to the 15% SDLT charge or the annual charge. The income tax and IHT issues which arise with personal ownership remain, but a trust gives some additional flexibility, whilst providing asset protection and confidentiality benefits;
- a partnership structure. Subject to certain conditions, the SDLT, CGT and annual charges should not apply, and IHT protection may be available.
Some points to bear in mind
- The proposals are not final and no steps should be taken to unwind existing structures until the details of the new rules are confirmed.
- If re-structuring is required it should, in many cases, be possible to do so in a tax efficient manner.
- Specialist advice should be sought for any new purchases of UK residential property.
- Where UK residential property is being purchased for personal use additional considerations apply.
- The tax treatment of UK residential property purchased for development or trading is different, and exemptions may apply. Some of these exemptions may extend to investors into residential property, such as collective investment schemes.
- The 15% SDLT rate, the new annual charge and proposed CGT charge only apply to acquisitions and holdings of UK residential property, worth more than £2m, by “non-natural persons”.
- Many high value UK residential properties are held via non-UK companies, which are themselves held via non-UK trusts. Many of these structures will be affected by these new provisions, and therefore restructuring may be required. However considerable care will need to be taken to ensure that any restructuring does not of itself cause tax charges under existing anti-avoidance legislation.
This note is a general guide based on the current law and proposals as at 12 June 2012. Tailored advice on the facts should be sought to confirm the precise UK tax implications and ensure the right acquisition structure.