The Government released further details of the proposed new taxes on UK residential property owned by “non-natural persons” on Tuesday 11 December.
Most of the news is good. The scope of the charges have been restricted. The CGT charge will now only apply to gains accruing after April 2013, and not to gains which accrued prior to that date. Trustees and partnerships will not be subject to the annual charge (now to be known as the annual residential property tax or ARPT) or the extended CGT charge. The extended CGT charge will apply to direct property interests only and not, for example, shares in property rich companies. Residential property used for a variety of business purposes will now be exempt from the new charges (see our blog article on the 15% rate of SDLT for further details). Marginal relief will apply to mitigate the effect of properties worth just over £2 million falling into the charge to CGT.
Some of the news is not so good. The Government’s plan would seem to be to implement the CGT changes with effect from 6 April 2013 and not delayed until later in 2013 as had been widely hoped (although the implementation date is less of a concern now that base costs will be uplifted to 6 April 2013). The rate of CGT to be applied to gains made by non-natural persons is to be 28%, the current higher rate of CGT. The Government is considering extending the CGT charge to UK resident non-natural persons as well. Principal private residence relief will not be available.
Announcements on some points have been deferred. The draft legislation implementing the new CGT charges will not be released until January 2013 which would leave taxpayers just over two months to consider the detailed proposals and restructure their affairs accordingly. There is, however, enough detail here to allow firmer plans to be drawn up although, now that the spectre of pre-2013 gains coming into the charge to CGT has been removed, in many cases we anticipate property owners will decide to leave existing structures intact, at least for now.
Direct ownership and trusts
Individuals (whether resident in the UK or not) who own real estate directly (whether as trustees or in their own right) will remain outside the scope of both the ARPT and the extended CGT charge.
Trustees are no longer to be brought within the scope of either the ARPT or the extended CGT charge, and so trustees will be free to sell real estate or shares in real estate owning companies without these charges applying. Existing UK anti-avoidance legislation may, however, need to be considered.
Non-resident individuals and companies
Non-resident individuals owning UK real estate through companies are potentially affected by these new taxes.
A direct disposal (i.e. of the real estate by the company) after April 2013 may give rise to a CGT charge but, as announced on Tuesday, the properties will effectively be “rebased” for this purpose, replacing the company’s actual base cost with the April 2013 market value so that only gains accruing post-April 2013 will become chargeable.
Affected non-resident individuals will need to weigh the costs of retaining the structure (i.e. the ARPT and CGT on any gains arising post April 2013) against the benefits of retaining it (i.e. protection from UK inheritance tax and confidentiality).
Where this balance lies is likely to depend upon the individual’s views on whether central London property prices will continue to appreciate and how the cost of the ARPT compares to the costs of borrowing or life assurance premiums to manage the inheritance tax risk which would exist if the property were owned directly.
Resident non-domicillaries and companies
Resident non-domiciliaries owning property through companies (or via trust and company structures) are also potentially affected by these new taxes.
For many affected taxpayers, the “cliff edge” effect has been removed from these proposals, so that restructuring can be deferred until later in 2013 without a dramatic increase in the potential tax charges. If a company structure is unwound in say mid 2013, the tax cost of doing so would include some ARPT (the full charge will be payable at the start of the tax year and a proportion refunded if the property is disposed of during the tax year) and some potential CGT exposure (i.e. on any gain accruing from April 2013 to the date of disposal). Restructuring simply in response to these proposals is now less of an immediate priority.
Any plan to restructure would inevitably need to take into account existing UK anti-avoidance rules which can attribute to such an individual the whole of any capital gain (not just the post-2013 element) arising to an offshore company which disposes of a UK property. The “balance” to be weighed by resident individuals will include this additional feature i.e. retaining the corporate structure will bring additional costs of the APRT and CGT on post-April 2013 gains and will continue to provide not only IHT protection and confidentiality, but will also avoid the risk (at least for the time being) of the entire historic gain becoming taxable to the individual pursuant to the anti-avoidance rules. The balance may favour retention of the existing structure, particularly for individuals who intend to become non-resident at some future point.
A substantial amount of material was released on Tuesday. This, along with the draft CGT legislation which is to be released next month, will need to be considered carefully before any decision can be made as to whether and how to restructure. It seems likely that, in many cases, the consequences of not restructuring will be far less draconian and for those who do wish to restructure, there may be less of a pressing need to do so before the end of the tax year. Phew.