High value UK residential property: Capital Gains Tax changes announced

Author: Helena Luckhurst

On 31 January 2013, the Government published draft legislation for inclusion in the Finance Bill 2013 which affects companies (whether UK resident or non UK resident), partnerships with at least one corporate partner and collective investment schemes (Non Natural Persons) owning an interest in UK residential property in excess of £2,000,000.

As from 6 April 2013, 28% UK Capital Gains Tax (ARPT CGT) will be payable if a Non Natural Person disposes of UK residential property in excess of £2,000,000 (High Value Disposals). Disposals include transfers for less than full market consideration and gifts.

The new ARPT CGT regime extends to High Value Disposals by joint owners if at least one of the owners is a Non Natural Person. Part disposals may be caught and disposals of units in the same dwelling made up to six calendar years before the present disposal (but only if those previous disposals occur after 6 April 2013) will be cumulated when calculating if the £2,000,000 threshold is exceeded.

Broadly speaking, the aim of the new legislation is to ensure that if the property owner is liable to pay the new Annual Residential Property Tax (ARPT), it will also be liable to pay ARPT CGT.

Softening the blow

However, there are a number of exclusions and exemptions:

  • If the property qualifies for an ARPT relief at some point during ownership, gains deemed to accrue during an ARPT relief qualifying period will not be subject to ARPT CGT. See our December 2012 briefing note on “High value UK residential property” for details of the ARPT reliefs. ARPT reliefs must be claimed by tax return each tax year.
  • APRT CGT will not be payable on High Value Disposals in respect of gains accrued prior to 6 April 2013. Where applicable, pre-6 April 2013 gains will be subject to Corporation Tax or normal CGT. This arrangement will apply automatically, although it will be possible to make an irrevocable election to disapply automatic rebasing if desired (e.g. to allow for losses).
  • Trustees, whether UK resident or companies or otherwise, will not be liable to pay ARPT CGT on High Value Disposals.
  • Companies acting as a nominee will not be liable to ARPT CGT on High Value Disposals.
  • If a company ceases to be UK resident, a High Value Disposal will not be triggered.
  • To avoid market distortion, ARPT gains will be tapered if the property is worth just over £2,000,000 on disposal.

Interestingly, disposals of the Non Natural Person itself are not affected by these changes. However, disposing of the Non Natural Person may give rise to gains under normal CGT rules. This could make terminating Non Natural Persons without a tax charge difficult for UK residents in particular, who may wish to do so in response to these changes.

Next steps

Although the draft legislation is subject to technical consultation until 22 February, substantial re-writes are not expected. The draft legislation has confirmed the Government’s intention to closely link together liability to the new ARPT and ARPT CGT for Non Natural Persons. In our view, those affected by ARPT can now progress with planning their response to these changes, ideally ahead of their introduction in April 2013 but preferably before the introduction of the new general anti-avoidance rule (GAAR) into the UK tax code which is expected by the end of July 2013.

If the intention is to retain ownership by a Non Natural Person for the moment, obtaining a 5 April 2013 valuation will prove useful in the event of future disposal.

Helena Luckhurst, Partner, Fladgate LLP (hluckhurst@fladgate.com)

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