New tax rules for ‘Non-naturals’ buying UK residential property

 In Tax

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Tax rules for ‘Non-naturals’ buying UK residential property

Introduction

On 31 May 2012, the UK Government published a consultation paper on two new tax measures:

  • the introduction of an annual charge, now to be called Annual Residential Property Tax (ARPT), on residential properties valued over £2m owned by certain ‘non-natural persons’; and
  • the extension of capital gains tax (CGT) to the disposal of UK residential property by foreign non-natural persons.

Draft legislation has now been published in Finance Bill 2013 (on 11 December 2012) but more legislation is awaited in January and it is possible some details may change prior to Royal Assent.

The Annual Charge

The annual charge is a new tax, from 1 April 2013, where a ‘non-natural person’ owns UK residential properties valued over £2 million.  It will not matter whether the ‘non-natural’ person is based in the UK or overseas.

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For these purposes, a ‘non-natural’ person is defined as:

  • a company or other body corporate,
  • a collective investment vehicle, and
  • a partnership where one or more of the above is a partner.

Trustees, including corporate trustees, will not be caught by the new charge (unless they own the property via an underlying company).

Following extensive lobbying at consultation stage, relief will be available against the tax for residential dwellings that are:

  • leased out in a qualifying property rental business;
  • held for sale in a qualifying property development or trading business;
  • exploited in a qualifying trade of permitting the public to visit, stay in or otherwise enjoy the property;
  • provided for certain employees and partners to use in the owner’s trade; and
  • qualifying farmhouses occupied by working farmers.

Dwellings held for charitable purposes and certain other diplomatic or publicly-owned properties are also excluded.  The previous requirement that the property development business must have been operating for at least 2 years has been removed.

The 15% rate Stamp Duty Land Tax legislation will be amended to mirror these reliefs, effective from Royal Assent of Finance Bill 2013. The reliefs will also apply to the extended CGT regime (see below).

The value of the property interest will be its market value last year, so on 1 April 2012 (or the date it was acquired, if later).  Properties will need to be re-valued every five years so a further valuation will not be required until 1 April 2018.  There will be penalties if taxpayers fail to take proper care to establish a correct valuation. HMRC will offer a free valuation checking service to property owners to confirm which band the property falls into, but only if the estimated value is within 10% of a threshold (e.g. £1.8m – £2.2m).

The new annual charge will be self-assessed. The due date for returns and for payment of the annual charge will be 15 April of each year but, for the first year, returns will be due on 1 October 2013 and payment by 31 October 2013.  Any exemptions will have to be claimed.

The charge will depend on which ‘band’ the property value falls into:

Property Value Annual Charge 2012 – 13
£2m to £5m £15,000
£5m to £10m £35,000
£10m to £20m £70,000
£20m + £140,000

 

It should be stressed that these charges will also apply to UK companies (and other non-naturals) owning £2m+ residential property in the UK.

Capital Gains Tax

Under existing rules, CGT is generally only applied on chargeable gains accruing to a UK resident person.  From April 2013, CGT will be extended to gains on UK residential property disposed of by foreign non-natural persons.

In the original proposals, there was a mismatch between the definition of ‘non-natural persons’ for the purposes of the ARPT and for the extended CGT regime.  It has now been announced that the proposed CGT charge will apply only to:

  • companies
  • corporate members of partnerships (but not individual partners or trustees) and
  • collective investment vehicles that own and dispose of UK residential property.

The extended CGT regime will not apply to trustees, as originally proposed.

The reliefs referred to above, in relation to the ARPT and 15% SDLT rate, will also apply to the extended CGT regime.  This means CGT will not apply to properties that are rented out to unconnected third parties.  In addition, no CGT will apply if the property qualifies for IHT conditional exemption.

For consistency, the Government is considering extending the CGT regime to apply also to disposals of high value residential property by UK non-natural persons. Such sales are currently subject to corporation tax at a lower rate. If introduced, this would mean that all non-natural persons, both UK and non-resident, would be subject to CGT at 28% (unless exempt). This proposal is subject to consultation, ending on 18 January 2013.

Gains on UK residential property held directly by a non-resident individual will not come into the CGT regime.

Further details will be available on publication of the draft legislation, expected in January 2013.

Again the new CGT charge will apply only to the disposal of residential properties where the amount or value of the consideration exceeds £2 million.

There are specific reliefs for CGT and the intention is to allow non-residents to have the same reliefs “without opening up the regime to avoidance opportunities”.  We will have to see what that means in practice.  Generally, principal private residence relief will not be available as the disposal will not be by an individual.

Gains will be calculated in the ‘normal way’, including deductions for allowable costs. The rate of the CGT charge will be 28 per cent, with a tapering relief for gains where the property is worth just over £2m. This is to prevent sales at artificially reduced prices to just below the £2m threshold (which would impact on the SDLT payable by the purchaser). The aim is to ensure no one is better off selling at just below £2m to avoid the CGT charge arising.

The charge will apply only to that part of the gain that is accrued on or after 6 April 2013.  This is good news as it means no action is needed prior to 6 April 2013 to ‘rebase’ the property value.  Losses will be available, but can only be set against gains on other high residential property sales.  Also, only losses down to £2m will be allowed.

Finally, the initial proposals to apply CGT to sales of property-owning vehicles have been dropped.  HMRC appear to have accepted that this would not be workable, given there would be no mechanism for knowing when an offshore property-owning company had been sold.

Overall the new proposals are much better than the initial announcements and it is good to see HMRC listening to the consultation replies.

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