Extension of taxation on UK residential property held by non-natural persons
As one of a number of measures aimed at tackling tax avoidance, the Government is extending the package of taxes on “enveloped dwellings”, lowering the threshold so that the relevant taxes apply to residential properties worth over £500,000 (rather than only to those worth over £2 million).
More specifically, companies, partnerships with company members and collective investment schemes (collectively referred to as non-natural persons (NNPs)) which purchase, own or dispose of residential property in the UK worth over £500,000 and up to £2 million, other than those which fall within specified exemptions, will be subject to the following taxes:
- stamp duty land tax (SDLT) at 15 per cent on acquisition of a residential property – this will take effect for transactions where the effective date (normally the date of completion) is on or after 20 March 2014, although there are transitional provisions which apply in respect of contracts entered into before 20 March 2014 but completed on or after that date;
- an annual tax on enveloped dwellings (ATED) – the new band for ATED applying to residential properties worth more than £1 million and not more than £2 million, with an annual charge of £7,000, will apply from 1 April 2015. In the first year returns applicable to this band will not be required until 1 October 2015 with payment required by 31 October 2015. An additional band for ATED applying to residential properties worth more than £500,000 and not more than £1 million, with an annual charge of £3,500, will apply from 1 April 2016; and
- capital gains tax (CGT) at 28 per cent on any gain on disposal (whether by UK or non-UK resident NNPs) – this will take effect from 6 April 2015 for properties worth more than £1 million and not more than £2 million and from 6 April 2016 for properties worth more than £500,000 and not more than £1 million. The charge will apply only to that part of the gain that is accrued on or after the specified dates. The balance of any gain will continue to be treated as at present.
This is an easy political win for the Chancellor, no doubt appealing to the masses. It is also an easy revenue raiser. The Government has raised five times more tax than was expected under the current ATED regime applying to properties worth more than £2 million; it is understood they had not expected so many properties outside of London to fall within ATED. As well as tackling tax avoidance, the Government believes ATED incentivises commercial activities and discourages under-use of properties by providing relief where, for example, a property is rented out.
There are, however, potentially significant increased compliance costs for those genuine commercial businesses who will qualify for relief from the above taxes (such as property investors and developers) but have to comply with the obligation to file returns and claim relief from the ATED charge. In recognition of this, the Government will consult on possible options to simplify the administration of ATED for property businesses eligible for reliefs.
This is yet another change to the tax regime which could easily have been brought in when the package of charges aimed at enveloped properties was originally introduced. One of the continuous complaints about the UK tax system is the constant changes that taxpayers have to cope with, making the taxation environment difficult to plan in with any level of certainty.
Some clients will may want to remove residential properties from their corporate wrappers to avoid the ATED and CGT. There are however no specifics reliefs available to achieve this so the ability to do this without significant cost will depend on the precise circumstances. Some (such as UK resident non-domiciliaries) may prefer to suffer the ATED charge to avoid that part of their estate falling within the UK inheritance tax net.
CGT on disposals of residential property by non-residents
As a separate point, nothing more detailed has yet been published by the Government regarding it proposals to introduce CGT on future gains made non-UK residents disposing of UK residential property from April 2015. A consultation is expected shortly which will, hopefully, amongst other things, shed some light on how this CGT charge will interact with the ATED.