More details are now available regarding the Government’s attack, announced in Budget 2012, on perceived tax avoidance through the “enveloping” of high value residential property in corporate (and other) vehicles.
Following the increase in SDLT on the acquisition of residential dwellings worth more than £2 million to 7%, or 15% where such property is acquired by certain non-natural persons (including companies, partnerships with a corporate partner and collective investment vehicles), from 21 March 2012, the Government launched a consultation on 31 May 2012 entitled “Ensuring the fair taxation of residential property transactions”.
The consultation covers:
- the introduction from April 2013 of an annual charge (at graduated rates from £15,000 to £140,000) on residential property worth over £2 million owned by such non-natural persons; and
- the extension of capital gains tax (CGT), at rates to be announced in Budget 2013, to gains arising on the disposal of residential property worth more than £2 million on or after 6 April 2013 by companies and certain other entities (other than individuals) which are not tax resident in the United Kingdom. In addition to corporate bodies, this measure could extend to non-resident trustees, personal representatives, clubs and associations and other non-natural entities established in other jurisdictions.
The supposed aim of the CGT extension is (i) to support the annual charge by further deterring enveloping; and (ii) to create a more equal tax treatment between UK residents and non-UK residents. As well as applying to direct sales of property, it could also apply on the indirect sale of property through the sale of shares in a property owning company (where 50% of the value is attributable to UK residential property). And although the CGT charge will only arise on disposals made on or after 6 April 2013, it is retrospective in that it will apply to historic gains accruing during the entire period of ownership of the property (not simply gains arising since April 2013).
Practical points to note are as follows:
- Despite the fact that there are often many other reasons, apart from tax avoidance for buying property through a company (such as protecting ownership, maintaining privacy, inheritance tax planning, complying with laws in foreign jurisdictions), future enveloping of UK residential property will clearly be unattractive.
- It will be imperative for clients who currently own UK property through non-natural entities to review their existing structures.
- Restructuring to avoid the new charges will require careful consideration; for UK resident entities or individuals in particular, it will be difficult (though not necessarily impossible) to restructure without triggering UK tax consequences. Expert advice should be sought.
- Non UK resident individuals should consider whether it makes sense to wind up corporate structures, or sell relevant UK property, prior to April 2013.
- Consideration should be given, at the very least, as to whether it is possible to uplift the base cost of UK properties held by non-natural non-resident entities so as to protect historic gains from the proposed new CGT charge.
- Non-tax issues will also need to be addressed, as many commercial structures which are not tax driven involve holding property through corporate vehicles. Thought will need to be given as to whether non-SDLT avoidance objectives can be achieved through other means.
- Concerns in relation to the impact of the proposed new measures on those entities carrying on genuine residential property development and property investment business have been partly addressed, but there are still significant concerns. In particular, the requirement that a “bona fide property development business” must have been operating for over 2 years will unfairly prejudice new entrants to the market if it is not relaxed.
Anyone who may be adversely affected by the proposed changes should respond to the proposed consultation, which closes on 23 August 2012.