The eagerly awaited consultation paper on the new annual charge and capital gains tax charge on non-UK entities holding UK residential property, has now been published. The consultation runs until 23 August.
The consultation paper confirms the intention that:
- the new provisions are designed to encourage the winding up of offshore structures holding UK residential property;
- the new capital gains tax charge will only apply where the disposal consideration is over £2m - this is in line with the £2m threshold for the annual charge and new SDLT rate;
- the rate of the new capital gains tax charge will be confirmed in the 2013 Budget - this is unhelpful, as it will be harder to determine financial exposure under these new provisions. We would expect the new rate to be tied to the 24% corporation tax rate, or the 28% capital gains tax rate;
- non-UK resident corporate (or individual) trustees will be caught by the new capital gains tax charge on disposals of UK residential property - this was as anticipated, although some were still hoping (in vain) that corporate trustees would be excluded from this charge;
- there will be no rebasing of UK residential property - this introduces an element of retrospectivity, as historic value increases would be charged under the new provisions;
- the consultation will consider the scope for double charges to capital gains tax where a gain may be chargeable under existing legislation on beneficiaries or shareholders, and under the new capital gains tax provisions - it is not entirely clear that double charges will be relieved, but we would expect that concern to be addressed in the consultation process;
- non-UK resident corporate (or individual) trustees will not be subject to the new annual charge on UK residential property;
- property revaluations for the annual charge will be on a 5 yearly basis, and the annual charge will increase with the Consumer Price Index - this will generate a new administrative burden;
- the capital gains tax provisions will apply to gains which are derived more than 50% directly or indirectly from UK residential property - this is a concerning addition to the consultation, as it implies that there may be a new charge on the disposal of shares in non-UK companies holding UK property. It should be remembered that one of main reasons for this new collection of measures, is that it was deemed too complicated to impose a new stamp duty charge on the transfer non-UK companies - this proposal raises similar difficulties;
- the consultation will also cover the application of the new provisions to investment companies and developers - it is anticipated that there will be some relaxation of the provisions where it can be shown that they unintentionally catch genuine residential property development and property investment businesses.
The consultation paper confirms that the Government will publish a response to the consultation and draft legislation, in the Autumn. There will then be further consultation prior to the introduction of the legislation in the Finance Bill 2013.