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New Tax Rules For ‘Non-Naturals’ Buying UK Residential Property

Author: PWT (info@pwtadvice.co.uk ) - 09/01/2013

BACKGROUND

On 31 May 2012, the UK Government published a consultation paper on two new tax measures:

This followed on from an increase in Stamp Duty Land Tax ("SDLT"), payable by certain non-natural persons, on the purchase of £2m+ residential properties. The rate rose from 7% to 15% on 21 March 2012.

Draft legislation has now been published in the Finance Bill 2013 (on 11 December 2012) but it is possible that some details may change prior to Royal Assent.

ANNUAL RESIDENTIAL PROPERTY TAX

Introduction

Annual Residential Property Tax is a new tax, from 1 April 2013, to apply where a "non-natural person" owns a UK residential property valued over £2m on specified valuation dates. It will not matter whether the "non-natural person" is based in the UK or overseas.

For these purposes, a "non-natural" person is defined as:

Following extensive lobbying at the consultation stage, relief will be available against the tax for residential dwellings that are:

Dwellings held for charitable purposes and certain other diplomatic, publicly-owned properties are also relieved. The previous requirement that the property development business must have been operating for at least 2 years has been removed.

The 15% rate Stamp Duty Land Tax legislation will be amended to mirror these reliefs, effective from Royal Assent of Finance Bill 2013. The reliefs will also apply to the extended CGT regime (see below).

Application

The new ARPT will apply where a non-natural person owns a chargeable interest in residential property (including a residential dwelling which forms part of a mixed-use property) but only if the interest has a taxable value of more than £2m on the relevant valuation date.

It will not matter whether the interest is freehold or leasehold, or whether it is jointly owned with other people who do not pay the charge.

The value of the property interest will be:

Properties will have to be re-valued every five years so a further valuation will not be required until 1 April 2018.

A valuation done by a suitably qualified real estate valuer will normally protect the taxpayer from penalties if in fact the property has been significantly undervalued. A self-valuation would provide no protection.

Penalties may also apply if a non-natural person fails to take proper care to establish a correct valuation (e.g. by not paying the charge when the property is in fact worth more than £2m).

Once the value has been ascertained, the property will fall into a "band" of charges. The same band will apply to the property for the next five years, unless the property is put into another structure within that five-year period (these properties will be re-valued at the point of restructuring).

HMRC will offer a free valuation checking service to property owners to confirm the correct band, but only where the estimated value is within 10% of one of the thresholds referred to below (£2m, £5m, £10m and £20m), e.g. in relation to the £2m threshold, where the estimated value is between £1.8m - £2.2m.

Annual Residential Property Tax Return

The new annual tax will be self-assessed and included in an Annual Residential Property Tax Return. HMRC will have powers to enquire into returns and also to make assessments to ensure compliance.

A return will require separate information for each property owned by a non-natural person that is within the charge, including details of the address of the property, the Land Registry title, the interest held, the beneficial owners of the property (including their addresses if different from the property address), the valuation of the relevant property, the band applicable and the amount due.

Returns and payment will usually be due on 30 April but, for the first year, returns will be due on 1 October 2013 and payment by 31 October 2013.

Charging structure

The annual chargeable amount will depend on which of the fixed bands the property value is within and will be indexed to the Consumer Prices Index.

For the moment, the bands will stay as originally proposed:

Taxable value of interest on relevant dayAnnual chargeable amount
£2m to £5m£15,000
£5m to £10m£35,000
£10m to £20m£70,000
£20m +£140,000

It should be stressed that these charges will also apply to UK companies (and other non-naturals) owning £2m+ residential property in the UK.

CAPITAL GAINS TAX

Introduction

Under existing rules, CGT is generally only applied on chargeable gains accruing to a UK resident person. From 6 April 2013, CGT will be extended to gains on the disposal of UK residential property worth over £2m made by non-natural persons who are not resident in the UK.

Draft legislation is expected in January 2013.

Application

In the original proposals, there was a mis-match between the definition of "non-natural persons" for the purposes of the ARPT and for the extended CGT regime. It has now been announced that the proposed CGT charge will apply to companies, corporate members of partnerships (but not individual partners or trustees) and collective investment vehicles that own and dispose of UK residential property. The extended CGT regime will not apply to trustees, as originally proposed.

The reliefs referred to above, in relation to the ARPT and 15% SDLT rate, will also apply in relation to the extended CGT regime. This means the CGT will not apply to properties that are rented out to unconnected third parties. In addition, no CGT will apply if the property qualifies for IHT conditional exemption.

For consistency, the Government is considering extending the CGT regime to apply also to disposals of high value residential property by UK non-natural persons. Such sales are currently subject to corporation tax at a lower rate. If introduced, this would mean that all non-natural persons, both UK and non-resident, would be subject to CGT at 28% (unless exempt). This proposal is subject to consultation, ending on 18 January 2013.

Gains on UK residential property held directly by a non-resident individual will not come into the CGT regime.

Further details will be available on publication of the draft legislation, expected in January 2013.

Calculation

It is expected that gains will be calculated in the "normal way", including deductions for allowable costs.

The rate of the CGT charge will be 28 per cent, with a tapering relief for gains where the property is worth just over £2m. This is to prevent sales at artificially reduced prices to just below the £2m threshold (which would impact on the SDLT payable by the purchaser). The aim is to ensure no one is better off selling at just below £2m to avoid the CGT charge arising.

The charge will apply only to that part of the gain that is accrued on or after 6 April 2013. This is good news as it means no action is needed prior to 6 April 2013 to "rebase" the property value. Losses will be available, but can only be set against gains on other high value residential property sales. Also, only losses down to £2m will be allowed.

Finally, the initial proposals to apply CGT to sales of property-owning vehicles have been dropped. HMRC appears to have accepted that this would not be workable, given there would be no mechanism for knowing when an offshore property-owning company had been sold.

Overall the new proposals are much better than the initial announcements and it is good to see HMRC listening to the consultation replies.

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Please Note:
These articles were based on the legislation in force at the date of publication. The laws may well have changed since. These articles should not be taken as being or replacing proper legal advice.

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