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CGT (Capital Gains Tax) on propertyAnnual tax on enveloped dwellings (ATED)

In the 2013 Finance Bill the Chancellor introduced the ATED (formerly the high-value residential property tax) to stop the use of “envelopes” for the ownership of residential property in the UK. This affects non-domiciled individuals who use overseas companies, and other structures, to hold UK residential property. It affects properties with a value of at least £2 million (at the moment), so that:

  • stamp duty land tax (SDLT) is payable at 15% on acquisition,
  • an annual tax on dwellings (ATED) applies at a fixed amount depending on the value, and
  • capital gains tax (CGT) is payable at 28% on a proportion of gains.

The ATED rates applicable are:

  • Property value £2,000,000 – £5,000,000               – £15,000
  • Property value over £5,000,000 – £10,000,000     – £35,000
  • Property value over £10,000,000 – £20,000,000    – £70,000
  • Property value over £20,000,000                        – £140,000

Where the property was held as at 6 April 2013 the value is rebased to that date so that CGT is only applicable to gains accruing from that date. Gains (and losses) are restricted to the lower of the actual gain, or 5/3rds of the value of the sale proceeds over £2,000,000. No indexation allowance is available for companies, and such a property cannot ever qualify for principle private residence relief.

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In the 2014 Budget, the Chancellor announced the following changes:

  • From 30th March 2014 the value limit for SDLT purposes is reduced to £500,000
  • Two new bands are being introduced for the ATED:

o    Residential properties valued at over £1,000,000 – £2,000,000 – from 1 April 2015

o    Residential properties valued at over £500,000 – £1,000,000 – from 1 April 2016

  • The CGT charge will apply:

o    To residential properties worth over £1,000,000 – from 6 April 2015

o    To residential properties worth over £500,000 – from 6 April 2016

Non-residents disposing of UK residential Property

In the Autumn Statement the Chancellor announced the extension from April 2015 of CGT to non-residents disposing of UK residential property. Generally, the UK has not charged CGT on disposals by non-residents. The government issued a consultation document in March 2014 setting out the scope of the new charge and invited responses by 20 June 2014. The current proposals are as follows:

The charge will apply to property used, or suitable for use, as a dwelling,that includes property which is in the process of being constructed, or adapted, for such use. Property used for commercial purposes will be excluded. Residential property used to generate income from letting will not be excluded.

The charge may be imposed where the property is owned by a non-resident entity such as a partnership or trust or a fund structure such as a collective investment scheme. Foreign Real Estate Investment Trusts (REITs) will not be taxable as long as they are equivalent to UK REITs. The extension is intended to include UK residential property sold by non-resident corporate envelopes, including properties valued below £500,000.

The intention is to treat non-residents who own residential property in the same way as residents are treated. In general the private residence relief (PPR) will not be available to the non-resident, as the UK property will not be the main residence. In certain circumstances PPR relief will be available. For example where an individual emigrates and sells what was the main residence, PPR relief will be available for the time the property was used as the main residence.

The government is also intending to change the main election rules as it is concerned that if non-residents become liable to CGT, then they would all nominate their UK residence as their PPR to avoid paying CGT. They will either:

  • Remove the election altogether, so that PPR is limited to property that is demonstrably the main residence, based on all the evidence, or
  • Introduce a fixed rule to determine the main residence, such as the one in which the individual has been present the most in the tax year.

The government is considering taxing non-residents in the same way as residents, charging a rate of 18% or 28% on the gain made, depending on the level of their total UK income and gains. To ensure that the tax is paid, the intention is to introduce a form of withholding tax that operates alongside an option to self disclose the tax due.

We will know more once the consultation is completed and the government respond. Watch this space!

 

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