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The UK Treasury's announcements on 11 December 2012 contained good news for non-UK individuals owning and investing in high value UK residential property through structures. The Government has significantly modified its original proposals, announced in the March 2012 Budget, aimed at taxing properties held through corporate and other "envelopes".
The modifications to the original proposals follow the responses to the Government's consultation paper "Ensuring the fair taxation of residential property transactions" published on 31 May 2012.
In the March 2012 Budget the Chancellor had announced three tax changes affecting valuable residential property:
(Note than none of the above charges affects property acquired and held directly by UK or non-UK individuals.)
The Treasury has now announced some helpful modifications to the original proposals:
Often, for non-UK individuals, the reason for using an offshore company, with or without a trust, to hold UK property is to shelter the property from inheritance tax ("IHT") on the death of a beneficial owner. Where a property is held in personal names or sometimes directly by trustees, IHT is payable at a rate of up to 40%; but the charge can be mitigated in various ways, for instance through life cover, by leaving the property to a spouse, or by borrowing against the property in cases where the IHT charge is only levied on the net value of the property.
In future, owner occupiers will need to decide whether to pay (1) ARPT and (2) CGT on the post-6 April 2013 element of any gain, but retain the IHT protection offered by a company, or to restructure to avoid the ARPT and future CGT, and find other ways of managing the IHT risk. If restructuring is decided on, it will still be better to do it before 6 April 2013 in order to avoid a pro rata annual charge payment, but it will no longer be such a serious issue if restructuring cannot be undertaken within that timescale. That is just as well given that the detail of the new CGT legislation will not now be published until January 2013.
The Chancellor has announced a series of reliefs aimed at removing genuine property related businesses from the new tax charges. The reliefs will thus apply to the 15% SDLT rate introduced in March 2012, the new annual charge and to the new CGT charge. The reliefs will take effect from Royal Assent of the Finance Bill in 2013. It is disappointing that they do not take effect earlier than this for the 15% SDLT charge, which has been in force since March 2012.
The main situations in which the relief applies are to:
The reliefs may be withdrawn if:
If in these cases relief is withdrawn then an additional 8% SDLT charge will be payable by the NNP who acquired the property.
There is an additional relief only for ARPT, applicable where properties have been granted conditional exemption from IHT. Conditional exemption and in respect of which the owner or another appropriate person gives undertakings to preserve the property, allow access and so forth.
As previously announced, the ARPT will apply in the following bands:
The charge will be increased each year in line with the Consumer Price Index but the brandings will not.
The charge applies to "dwellings". There are detailed rules about what constitutes a dwelling and in some cases it will be important to review these, for example, if there has been a conversion into multiple residences or if separate properties are amalgamated.
The consultation response and draft legislation on the ARPT include the following further detail:
Announcements concerning the new CGT charge include the following:
For many UK property investors, the most significant change from the original proposals is the exclusion from the new CGT charge of pre-April 2013 gains. Those who were considering restructuring simply in order to "rebase" the value of their UK property may no longer need to do so. They may decide to retain the existing structure, provided they are willing to pay the ARPT and the new CGT charge on eventual disposal of their UK property. For others who wish to liquidate any holding company in order to come outside the ARPT, the immediate urgency of doing so is reduced. Nevertheless, delay until after 5 April 2013 might mean having a CGT charge under the new rules, together with an annual charge in the first year (pro rata for the period during which the charge is applicable). For those individuals who might wish to dismantle their structures, therefore, it will be preferable to take advice as soon as possible with a view to restructuring before 6 April 2013.
This article was written by Piers Master.
For more information, please contact Piers on +44 (0)20 7203 5352 or email@example.com.