Author: Helena Luckhurst
The new Annual Residential Property Tax (ARPT) is almost upon us – in fact, if you are reading this on or after 1 April 2013, the new order is here!
What is ARPT? In summary, it’s a new UK annual tax, payable by ‘non-natural persons’ owning UK residential real estate worth more than £2,000,000 (High Value Property). ‘Non-natural persons’ (NNPs) means UK resident and non-UK resident companies, partnerships with at least one corporate partner and collective investment schemes. Trustees are not classed as NNPs.
The amount of tax payable depends on which value band the High Value Property falls into, as follows:
|GBP 2,000,001 – 5,000,000||GBP 15,000|
|GBP 5,000,001 – 10,000,000||GBP 35,000|
|GBP 10,000,001 – 20,000,000||GBP 70,000|
|GBP 20,000,001 +||GBP 140,000|
If that was not enough, the owner of any High Value Property that is subject to ARPT will have to pay 28% UK Capital Gains Tax (ARPT-CGT) on any disposal of the property after 5 April 2013 in respect of gains that have accrued after 5 April 2013. This change will apply to non-UK resident NNPs as well as UK resident ones.
Responsibility for ascertaining whether the property is one to which the ARPT applies, and in which band it falls, is down to the NNP. However, HMRC is offering a ‘pre-return banding check’ for properties close to the band thresholds. As it will be helpful for ARPT-CGT purposes as well, though, any NNP worried that ARPT may apply to their property may prefer to get an open market valuation done on the property as at 6 April 2013 anyway.
It is worth saying straightaway that certain High Value Properties, even if owned by a NNP, are not subject to ARPT or ARPT-CGT. Reliefs are available, including for NNPs that are property developers or property traders, or that run commercial property rental businesses. However, the reliefs are denied if certain persons are permitted to occupy the property, such as family members.
Any applicable relief will also have to be claimed on an ARPT tax return annually. The format of that tax return has not yet been published and there has been no indication of when it will be. It is possible that the tax return will only be published after 1 April, at which point any NNP who is within the ARPT will be obliged to submit a tax return, whether they can claim a relief or not.
It is also worth pointing out that, for the first ARPT tax year, the tax return must be submitted by 1 October 2013 and any ARPT due paid by 31 October 2013, rather than at the start of the ARPT year in April, as will be the case from ARPT tax year 2014/2015 onwards. In addition, ARPT is only payable on any days in any ARPT tax year that a NNP owns High Value Property to which no relief applies. Therefore, if the NNP ceases to own the High Value Property on, say, 1 July 2013, only three months of ARPT will be due and payment may be delayed until 31 October 2013.
New taxes are never welcome and the instinctive response may be to move the ownership of the High Value Property to someone, or something, that is not a NNP as quickly as possible.
However, it is worth pausing to reflect on the reason why the High Value Property has come to be owned by the NNP in the first place. Many people who are not resident in the UK and do not regard the UK as their permanent home (i.e. non-UK domiciliaries) want to have a real estate base in the UK, perhaps as a home or for investment reasons. For many years, the advice has been for non-UK domiciliaries to own UK real estate above a certain value in a structure, often taking the form of a company owning the High Value Property, the shares of which are either owned by the non-UK domiciliary personally or by the trustees of an offshore trust. One of the main reasons for doing this is to prevent a charge to 40% UK Inheritance Tax (IHT) becoming payable on the net equity of the property on the non-UK domiciliary’s death.
Accordingly, the first step that needs to be taken towards working out what to do is to compare the annual ARPT and any costs associated in running the structure with the IHT saving that the structure should deliver.
Of course, to make the calculation meaningful, you need to have some idea of how long you intend to hold the High Value Property for (are you likely to hold it until your death?), what it is going to be used for and to what extent the High Value Property is going to increase in value. Can you afford to pay ARPT every year? If you do pay it and you are UK resident, will you have to remit non-UK income and gains in order to pay the tax, which will compound your tax bill?
So long, and thanks for all the changes
Unfortunately, the issue of when to act is further complicated by the introduction of a general anti-avoidance rule (GAAR) into the UK tax code as part of the Finance Bill 2013. If a decision is taken to alter the structure, it may be best if any changes take place before royal assent of the Finance Bill 2013, expected in July 2013, otherwise consideration will have to be given to how the GAAR impacts on what is proposed.
Will the new ARPT and ARPT-CGT put off those wanting to invest in High Value Property in future, and affect the prime UK property market generally? Only time will tell. In the meantime, we are starting to have a lot more conversations about IHT mitigation and how, for married couples, putting in place UK Wills can reduce their IHT liability. Direct ownership of UK property also means that UK succession rules might govern what happens to the property on the owner’s death. However, that is another story entirely.
(With apologies to fans of the author Douglas Adams)
Helen Luckhurst, Partner, Fladgate LLP (firstname.lastname@example.org)