For this reason, wealthy individuals of myriad nationalities have for years been establishing a base in London. And as those who are in the business of advising such individuals will tell you, most of them have sought where possible to minimise the adverse tax implications associated with this – for example, by having the ownership of their UK homes held by an offshore entity.
Such offshore entities have long been de rigueur among those seeking to reduce the impact of stamp duty land tax (SDLT) and capital gains tax (CGT) in particular.
This situation may be about to change, however, with potentially significant implications for these foreign holders of UK residential property, as the cash-strapped, recession-battered UK Government looks for new ways to boost the tax contributions of its wealthiest residents.
This, of course, also has potentially significant implications for advisers whose wealthy expatriate clients continue to own, or inherit, expensive properties in the UK, or who fall into the “internationally mobile wealthy” category.
The Osborne ‘mansion tax’
Observing in his 2012 Budget that “some people…avoid the stamp duty the rest of the population pays … by using companies to buy expensive residential property”, George Osborne has thus proposed:
- a 7% rate of SDLT on acquisitions of residential dwellings costing more than £2m (this rate has now been in force since the day after Budget Day, or 22nd March, "subject to transitional provisions for pre-existing contracts");
- an annual charge on residential property owned by “non-natural persons”, as from 1 April 2013;
- the extension of CGT to gains on the disposal of residential property owned by non-resident companies and others (but not individuals). This proposal is intended to take effect from 6 April 2013
Draft legislation for the annual charge and extension of CGT will be published in the autumn and introduced in Finance Bill 2013.
In the meantime, we have a consultation on the matter, which is open until 23 Aug, after which time, the Government has said, it will “consider the responses…continue to engage with stakeholders…[and] publish a response to the consultation in the autumn”.
This will be followed by draft legislation, also in the autumn, with the final version introduced in the Finance Bill 2012.
‘Non-natural persons’
Much hinges in all of this upon one’s definition of “non-natural persons” – which , not surprisingly, is something of a non-natural term for many normal people. And in this instance, it does not have anything whatsoever to do with unconventional personal preferences or android human beings.
As envisioned by the Government’s consultation, the three types of non-natural persons are:
(i) a company
(ii) a partnership including a company as a member
(iii) a collective investment vehicle
Stamp Duty Land Tax on acquisition
Stamp duty is nothing new in the UK, although it is not due on properties costing less than £125,000, and stays at just 1% until the price hits £250,001. (Earlier this month, the Land Registry reported the average UK home was valued at £161,677.)
Where it is about to be new, and potentially pricey, is where it is now to be charged at 15% on UK properties when they are purchased by non-natural persons. (See below.)
|
Purchase Price
|
Rate
|
|
Up to £125,000
|
0%
|
|
£125,001 – £250,000
|
1%
|
|
£250,001 – £500,000
|
3%
|
|
£500,001 – £1m
|
4%
|
|
£1,000,001 – £2m
|
5%
|
|
More than £2m
|
7%
|
|
More than £2m, when purchased by certain non-natural persons
|
15%
|
Source: HMRC consultation document
Annual Charge
As for the new proposed annual charge, the Government’s stated aim is to target it at those circumstances in which tax avoidance may be a significant factor.
|
Property Value
|
Annual Charge (2012-13)
|
|
£2m – £5m
|
£15,000
|
|
£5m – £10m
|
£35,000
|
|
£10m -£20m
|
£70,000
|
|
£20m +
|
£140,000
|
Source: HMRC consultation document
The property value is as at 1 April 2012, and properties will be re-valued every five years.
The annual charge will be up-rated annually in line with the Consumer Price Index.
The charge will be payable on 15 April annually – except for the first year (2012-13) when it will be payable on 1 October 2013.
Capital Gains Tax
Capital Gains Tax (CGT) generally applies only to chargeable gains accruing to a UK resident (although there are exceptions).
The consultation envisages an extension of the CGT charge to UK residential properties held by non-natural persons. Until now, such properties have avoided CGT.
The “extended” CGT charge will apply to situations in which the disposal proceeds exceed £2m.
Anti-avoidance provisions will ensure that disposals of shares in companies holding residential property (amounting to more than 50% of the company’s assets) will be “caught”. Normal CGT rules will apply.
For this extended charge, the non-natural persons category is:
- Companies and other bodies corporate;
- Trustees (excluding bare trustees but including trustees who are themselves individuals) and collective investment vehicles;
- Personal representatives;
- Clubs and associations; and
- Entities that exist in other jurisdictions allowing property to be held indirectly.
Residential property is within the scope of these charges whether occupied by the owner or let.
Although this is still in the consultation stage for now, it is almost certainly going to be implemented without significant change. Those impacted should seek professional advice.
Gerry Brown, technical manager at Prudential
