On 31 January 2013 the long expected draft legislation on the taxation of high value residential property was released. Properties are high value if they are worth more than £2 million.

The draft legislation covers the 15% stamp duty land tax charge that has applied to the acquisition of high value residential property since Spring 2012 and it confirms proposals for the Annual Residential Property Tax (ARPT) that will apply from 6 April 2013. In addition there are changes to the capital gains tax regime from 6 April 2013.

The legislation applies to “non-natural persons” which includes companies and partnerships (if one or more of the partners is a company). Trusts are excluded from this legislation.  Also excluded are genuine businesses carrying on a genuine commercial activity such as property rental or development and properties owned by charities for charitable purposes.
Stamp Duty Land Tax

Non-natural persons who purchase high value residential property have been subject to a 15% SDLT rate since March 2012.  Although the draft legislation confirms this proposal it also provides relief against the charge for genuine businesses carrying on a genuine commercial activity.  Those entities would be subject to a 7% rate of SDLT.
Annual Residential Property Tax (ARPT)

Non-natural persons who hold UK residential property valued at more than £2m on certain specified dates will pay ARPT of between £15,000 and £140,000, depending on the value of the property.  The £15,000 charge applies to properties whose value is between £2m and £5m.  The measure takes effect from 1 April 2013 and the annual tax is payable on 31 October 2013 for 2013/14 and  on 30 April for each subsequent year.

The amount of the ARPT will increase every year on an index-linked basis.  The value bands will not be adjusted for inflation.  Residential properties within the charge will need to be revalued every five years.
Capital Gains Tax

Capital Gains Tax will be chargeable on both UK and non-UK non-natural persons when they dispose of interest in high value residential property that is subject to ARPT.  Capital Gains Tax will apply to disposals on or after 6 April 2013 at a rate of 28%.  The tax will only apply to increases in value of the property from 6 April 2013.  This therefore rebases the property values to that date.  Current indications are that the 28% will be subject to a form of taper relief where the property is just over the £2m mark.  This is to prevent distortion in the property market for properties worth marginally more than £2m.

Taxation at a 28% rate is higher than the standard corporation tax rate for UK companies. It is felt that very few UK companies will fall into the ARPT charge and therefore the impact of this tax anomaly is believed to be minimal.

The draft proposals permit the sale of offshore companies which hold high value residential property to remain free of UK Capital Gains Tax. However the purchaser of the company shares will inherit the Capital Gains Tax base cost of the property which is owned by the company. This may lead to considerable Capital Gains Tax at a future time if the property was sold by the company.

 

Conclusion

The impact of the proposals is to provide a disincentive for future purchases of high value residential property to be made using a wrapper such as an offshore company. The disincentive is the 15% rate of stamp duty land tax and the ARPT, whose minimum annual charge is £15,000.

Non UK owners of existing structures will need to weigh up the cost of the ARPT compared to the possible saving of capital gains tax by sale of the wrapper free of CGT.   There is also protection against UK Inheritance (Death) Tax by holding high value property in offshore structures. Owning properties in these wrappers is not just for tax reasons.  For example, some individuals hold them in offshore companies for privacy reasons.

If an existing structure is going to be caught be the new provisions then consideration should be given to restructuring the way property is owned before 1 April 2013.