H M Treasury published their consultation on ensuring the “fair taxation of residential property transactions” on 31 May 2012. This consultation will be open for a period of 12 weeks and will end on 23 August 2012. The consultation is a follow up to the UK Government’s announcements in March 2012 (2012 Budget) in relation to the introduction of new Stamp Duty Land Tax (SDLT) thresholds, in particular for non natural persons purchasing residential property worth over £2 million. The consultation introduces two new forms of taxation which will both take effect from March 2013. First, an annual charge linked to SDLT and, secondly, an extension to capital gains tax (CGT).
SDLT on acquisitions
The 2012 Budget announced that from March 2012: (a) purchasers of residential properties valued at £2 million and over would be subject to a 7% SDLT charge; and (b) this charge would increase to 15% in circumstances whereby the property is purchased by a “non natural person” (as defined below).
The annual charge
The consultation has now provided further details on the Government’s plans also to levy an annual SDLT charge in relation to non natural persons, subject to the 15% rate, which targets the practice of “enveloping” property into a structure for the purpose of avoiding SDLT.
In relation to the definition of non natural persons, the consultation states that the intention is for the same entities which are caught by the 15% SDLT rate also to be caught by the annual charge. Under the legislation introducing the 15% SDLT rate, this includes:
One positive aspect of the consultation is that it explains that the definition of non natural persons for the purposes of the annual charge (and this also applied to the 15% SDLT legislation) will not include companies acting in their capacity as trustee unless the trust in question is a bare trust. Bare trusts are specifically not included in the exemption because they are transparent for SDLT purposes. This means that any property acquired by bare trustees is treated for SDLT purposes as having been acquired by the beneficial owner and therefore SDLT is chargeable on that individual in accordance with their own SDLT rates.
More specifically, this measure targets offshore companies who, although pay SDLT when they purchase a property, achieve a sale of the property whilst it remains within the company without the need to pay either SDLT or the appropriate rate of stamp duty levied on the sale of shares within the UK.
The amounts of the annual charge are proposed to be as follows:
|Property value||Annual charge for 2012 to 2013|
|£2m to £5m||£15,000|
|£5m to £10m||£35,000|
|£10m to £20m||£70,000|
The annual charge is expected to increase annually in accordance with the Consumer Prices Index and, in addition, the charge will be calculated on the base of the market value as at the earliest of the following dates:
In addition, properties will need to be revalued every five years. The valuations are to be completed on a self-assessment basis, although the consultation does indicate that a report from a qualified surveyor should be obtained in order to avoid any penalties should the assessment be disputed. Other than stating that specific details in relation to the location and ownership of the property should be included in the assessment, the consultation does not explain the full level of information which HM Revenue & Customs (HMRC) may require.
Extension of CGT
The consultation announces that any gains made as a result of the sale or disposal of a residential property worth £2 million by certain non natural persons who are not resident in the UK will be subject to CGT.
The definition of non natural person for the purposes of this new measure is yet to be decided upon; however, the consultation has indicated that the intention is for this measure to catch a wider group of entities than those caught by the 15% SDLT rate and annual charge. The consultation suggests that the measure may apply to the following types of offshore entities and requests that the public gives their views on this:
As you can see from the above list, trusts are not excluded from the new measure. In addition, the measure could have further significant implications as the consultation states that this will apply:
a) not only to the direct sale of property but also to indirect sales, for example, by way of sale of shares in a property-owning company (where 50% of the value is attributed to UK residential property);
b) on all gains made in relation to the property and not just those which have arisen since the introduction of the tax; and
c) to commercially let residential property.
The actual rate of tax is yet to be announced and is due to be confirmed in the 2013 Budget; however, the rates will not be a topic for consultation. There are a range of rates between 20% and 28% which the Government could decide to use, based on the rates of CGT currently in place for individuals and trusts and the levels of corporation tax.
The current situation (prior to the introduction of the new rules) is that offshore companies and trusts are outside the scope of CGT as they are non resident entities. However, the extension of CGT in this manner has been put in place, according to the Government, in order to create a more equal tax treatment between UK residents and non UK residents.
However, the consultation does acknowledge that the UK tax legislation already includes complex anti-avoidance provisions that seek to attribute the gains back to UK residents involved in these types of structures, and the interaction between the new rules and the current legislation will need to be carefully considered.
In addition, it is important to note that, in relation to the new CGT extension, there is no need for an offshore trust to take any action if a beneficiary is in occupation and the principal residence relief is available. This will not, however, apply to property owned through a company as the relief is not then available.
Potentially, it may also be possible for an offshore non natural person to take advantage of a double tax treaty if they are also subject to taxation in that other jurisdiction.
Should offshore companies still be used to purchase UK residential property going forward?
The reasons behind using an offshore company or a structure involving non natural persons go further than focusing on the pure avoidance of SDLT or CGT and should, therefore, continue to play an important role in the ownership of UK residential property.
An offshore company can provide particularly valuable protection against inheritance tax and avoid the need for executors of an individual’s estate to apply for UK probate where the only UK asset which the deceased had an interest in is actually held by an offshore company.
In addition, an offshore company can provide a layer of privacy as it can be used to shield an ultimate beneficial owner from being connected with either the property or the registered legal owner. Also, there are cases where it is important to use an offshore company for reasons connected with another jurisdiction with which the individual or family is connected.
There are other ways that some of the objectives referred to above could be obtained without incurring tax charges under the proposed new rules. We would be happy to discuss with you the methods which may be applicable to your situation. By way of example, if an offshore company had previously been used for mitigating inheritance tax, then a similar objective could potentially be obtained by other methods such as debt structuring to reduce the value of the property or life assurance policies.
For existing structures, should they continue to hold UK residential property going forward?
The process of winding up existing structures in order to release the residential property from the application of the new rules could lead to other tax disadvantages. We would strongly suggest that advice is sought in relation to any existing structure prior to any action taken to effect a change in the legal ownership.
This is especially important where UK resident individuals are involved, as winding up the structure may itself incur a CGT charge under existing anti-avoidance rules. For example, these rules could potentially apply in the situation where an offshore trust holds residential property (whether via an offshore company or not) which is occupied by a non rent paying UK resident beneficiary. There are also anti-avoidance rules which apply to UK resident shareholders of offshore companies.
For non UK resident individuals (or structures set up for such persons), it may be an option to wind up a structure and own the property personally, although the inheritance tax implications on this will need to be considered. Alternatively, the property could be sold prior +April 2013 without any CGT implications.
Please note that this is not intended to be definitive guidance on these complex new provisions. Any individual who may be affected by the consultation should seek expert professional advice.