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Some good news for non-UK individuals investing in high value UK property

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:

  • From 21 March 2012 stamp duty tax ("SDLT") to be payable at 15% on the purchase of property costing more than £2m by certain non-natural persons ("NNPs") (ie companies, partnerships including a company partner and collective investment vehicles). (NB: the 15% SDLT charge applies to NNPs whether UK resident or non-UK resident).
  • From 1 April 2013 an annual residential property tax (“ARPT”) on residential property valued at over £2m owned by NNPs. (NB: The ARPT also applies to UK resident and to non-UK resident NNPs).
  • From 6 April 2013 capital gains tax ("CGT") to be extended to gains on the disposal of residential property valued at over £2m by non-UK resident NNPs and possibly by other kinds of persons as well.

(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:

  • The new CGT charge will not apply to the pre-April 2013 element of any gain on disposal by an NNP. Under the original proposal the new charge would have applied to the whole of any gain even if the property in question had been purchased many years ago. Removal of the "retrospective" element of the charge will be welcomed by taxpayers and in some cases removes the need for urgent (ie pre-April 2013) restructuring.
  • The CGT charge will be tapered for properties sold for just over £2m. This will reduce distortions in the market where vendors would otherwise receive more net of tax if they sold property for just under £2m than for just over that figure.
  • Exemptions from the 15% SDLT rate, the ARPT and the CGT charge will apply to property development and property letting businesses. These, together with a range of other exemptions, should reduce the impact of the new taxes on the London and UK residential property markets.

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.

Reliefs from the new property taxes

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:

  • Residential property acquired and held for the purposes of a property development trade. Although the existing proposals already contain such a relief, it was subject to a requirement that the trade of developing residential property must have a two year "track record". The problem with this was that each particular development is often set up in the form of a new corporate structure. Following the consultation the Government has therefore accepted that the requirement of a track record is not appropriate in this context.
  • Residential property acquired and held for commercial letting to third parties unconnected with the ultimate owner of the property.
  • Residential property held for the purpose of a trade of buying and selling property and not occupied by a connected person.
  • Properties acquired and held to be run as a trade in which the property is to be open on a commercial basis to the general public to visit and view (for example, a stately home) or for the provision of services (such as a hotel).
  • Buildings acquired and held by a company to provide accommodation for employees engaged in carrying on the business of the company (or another group company);
  • Farmhouses where a working farmer occupies a farmhouse connected to the worked farmland.
  • Dwellings held for the charitable purposes of a charity.

The reliefs may be withdrawn if:

  • the dwelling in question stops being used for a relivable purpose, or
  • (except in relation to farmhouses and houses exploited for public access) at any time within three years following acquisition of the property it is occupied or kept available for occupation by a person, such as a family member, who is connected with the owner.

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.

Annual residential property tax ("ARPT")

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:

  • The legislation now sets out rules for determining when the property is to be treated as entering or exiting the charge, for example, where a property converts to residential use or non-residential use or where several properties are converted into a single dwelling so as to come within the charge. In such cases ARPT will apply pro-rata for the relevant part of the tax year.
  • If the property comes within the charge during the year, returns will be required either 30 or 90 days after this, depending on the circumstances, or in 2013/14 on 1 October 2013 if it is later. Note that returns will still be required if a relief from ARPT is to be claimed. Otherwise, as previously announced, the annual self-assessment must be made by 30 April each year, with a separate return for each property. In 2013, however, the return must be submitted by 1 October 2013 and the tax paid by 31 October 2013.
  • Although the value of the property will be self-assessed for the purposes of the ARPT, the consultation response announces a free of charge pre-return banding check service.

Capital Gains Tax

Announcements concerning the new CGT charge include the following:

  • The new CGT charge applies to the same non-UK resident NNPs as those subject to ARPT. On that basis the new CGT charge will not apply to non-UK resident trustees. The charge will apply to non-UK resident companies, partnerships which include such companies and collective investment vehicles that own and dispose of high value residential property.
  • As with ARPT, the new CGT charge will not apply to disposals by genuine property businesses, charities and businesses disposing of employee accommodation (as described under reliefs above). There will, however, be some differences between CGT, ARPT and SDLT in the application of the reliefs to particular kinds of entities. These will reflect the differences in nature between those taxes. Guidance on this will be published in early 2013.
  • For the purpose of the new CGT charge, partnerships will still be treated as transparent. Therefore each partner is treated as independently disposing of their own capital share in underlying partnership assets and is taxable accordingly on a separate gain. This also means that partners who are trustees or individuals will not be subject to the new CGT charge.
  • The Government is considering extending the new CGT charge to disposals of high value residential property by UK NNPs that fall within the scope of ARPT in order to achieve consistency between UK and non-UK NNPs. The consultation response document points out that the various reliefs (described above) should ensure that genuine commercial businesses are not caught.
  • The new CGT charge will be at 28%. The Government has also announced that there will be taper relief to deal with the "cliff-edge" effect where a property is worth not far above £2m.  In such cases, especially where there is a large gain, there would otherwise be an incentive to reduce the sale price to just below £2m. The £2m threshold will not be indexed.
  • Although the original proposal for the new CGT charge included gains accruing on disposal of assets representing directly or indirectly UK residential property, the Government has now modified this. The extended CGT charge will now only apply to disposals of residential property directly held by non-UK resident NNPs. This excludes from the charge shares of collective investment vehicles. It is not absolutely clear fro the consultation response paper whether it excludes shares in companies where more than 50% of the value of the asset is derived from UK residential property. The position should be clarified once the legislation for the new CGT charge is published in January 2013.
  • An important development is the Government's decision that the new CGT charge will apply only to the part of the gain accruing on or after 6 April 2013. This means that only the part of the gain that relates to the period on or after 6 April 2013 will be subject to the new CGT charge. This will avoid the need for endeavouring to rebase the value of residential property held in non-UK resident companies before 6 April 2013. This will also have the advantage that it will not be necessary to look back through historic records on acquisition to establish the base cost.
  • Losses on the disposal of high value residential property will only be available to offset gains on disposals of the same kind of property (ie such losses will not be available to set off against the taxpayer's gains generally).
  • The new CGT charge potentially overlaps with other CGT charge potentially overlaps with other CGT charges which already apply to non-UK resident trusts. In the absence of special provisions, this could lead to double tax, for example, if a residential property is held through a non-UK trust and company structure. In such a case both the new CGT charge and the existing CGT charges will apply to gains of non-UK resident trustees could apply. To avoid double charges the Government will prioritise the new CGT charge.
  • The Government has confirmed that the principal private residence relief will not apply to disposals by NNPs.


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 piers.master@crsblaw.com.