The Government does not seem to have thought through the proposed changes to the SDLT and Capital Gains Tax (CGT) treatment of high value residential properties owned by "non natural" persons, which were announced today.
The Government proposes:
- to increase the rate of SDLT to 7% on all residential properties worth more than £2m, with effect from 22 March;
- with effect from 21 March, to impose a 15% rate of SDLT on the acquisition of £2m plus residential properties bought by "non natural persons", whether onshore or offshore;
- to consult on the introduction of a charge to CGT on residential property (apparently of any value) owned by non resident non natural persons, with a view to introducing legislation effective from 6 April 2013;
- to consult on the introduction of an annual charge on residential properties worth over £2m owned by non natural persons (UK or non UK) - so a sort of modified "mansion tax".
"Non natural persons" are to include companies, collective investment schemes and partnerships in which a non natural person is a partner (seemingly, even if the rest of the partners are natural persons). Companies which are trustees of settlements, will not be included.
The stated policy objective is to discourage people from transferring high value residential properties into structures which permit the transfer of the properties in a SDLT free way, with the ultimate objective of reducing the number of high value properties in such structures. And the Chancellor made very clear in his Budget speech that if advisors come up with clever ways round the new rules, he will not hesitate to legislate, retrospectively if necessary, to counteract such schemes. So does it make sense and will it achieve its aim?
Offshore companies are undoubtedly sometimes used to avoid SDLT on transfer (although its considerably less common than you might think from press commentary), but there are many other reasons why a property might be owned by a non UK company:
- in the first place, companies are not generally used by UK individuals. They are used by non domiciliaries (who may be resident) and by non residents. First and foremost, they are used to mitigate inheritance tax-non doms do not pay inheritance tax on non UK assets (such as shares in an offshore company) but would pay it on a UK property;
- ownership by a company alone creates other UK tax issues and the "classic" inheritance tax structure was to own a UK house through a non UK company owned by a trust;
- trustees do not like owning the property directly because of liability issues and so would want to hold it through a company;
- if the property is let, the corporate income tax on the rent is limited to the basic rate;
- offshore structures are often used to protect a non dom's assets in the event of divorce or to prevent claims by disappointed heirs under the home country's compulsory inheritance laws;
- there may be confidentiality issues for nationals of some countries, wealth can make the individual or his family a kidnap target.
Having said that, ownership of one's residence through an offshore structure is complicated and expensive and throws up many UK tax issues. As a result, many non doms simply buy their house in the names of husband and wife and plan around the inheritance tax exposure with insurance and debt.
None of this has anything to do with SDLT. Indeed, many purchasers are wary of buying property owning companies rather than the properties themselves because of the tax and compliance "baggage" that can attach to an existing vehicle. Ironically, these measures, may encourage the purchase of existing corporates, as there seems to be no plan to impose the new charges on the sale of the company shares, although the annual charge may be a disincentive to share sales, depending on the level at which it is pitched.
What really lifts these proposals into the "sledgehammer to crack a nut" category is that, on the information available at present, they are not limited to offshore companies and they are not limited to situations where individuals are seeking to avoid SDLT. They apply to an acquisition by any company, including a UK company and to wholly commercial businesses. While property developers are excluded from the 15% SDLT charge, property investment companies are not. So a company that buys a high value residential property to let, whether it is a one man band, a listed plc or an offshore property unit trust will pay 15% SDLT on the acquisition. The Chancellor tells us that Britain is open for business, but not, it seems, if your business is residential property investment. The impact assessment states that the number of businesses affected …. will be small! We must hope that when the Government reconsiders the impact of these proposals on the commercial residential property sector sense will prevail.
The proposed CGT charge also seems misconceived. Why should a non resident non natural person pay CGT on a UK residential property when there are already punitive SDLT and annual charges? Non resident individuals (and trustees) will not pay CGT on residential property and non resident non natural persons will not pay CGT on anything other than residential property! Nor will UK residents pay CGT on a property which is their principal residence. There seems little logic to the charge in the wider tax context.
The package of measures is certainly likely to discourage new acquisitions in corporate vehicles and we will need to consider how to achieve individual and trust clients' non SDLT objectives without using companies. Owners of existing structures have until April 2013 to unwind them, but any remaining in existence after that may become something of a poisoned chalice:
- the shares can, it seems, be sold free of SDLT, BUT the purchaser would be subject to:an annual tax charge (at an unknown rate);
- a capital gains tax charge if the company sells the property;
- capital gains tax if he buys the company and liquidates it.
In short, the proposals are likely to achieve their objective of reducing the number of residential properties held in corporate structures, but will make it more difficult for purchasers of high value properties to carry out routine tax mitigation - which is still available for all other asset classes - in relation to residential property, and to achieve the many non tax goals for which offshore structures are used. In addition, and perhaps more importantly, it will have an adverse impact on the residential property investment sector. It does not help to create a coherent tax regime.