Extension of the Annual Tax on Enveloped Dwellings (‘ATED’)
The ATED is an annual tax charge of up to £143,750 on residential property situated in the UK worth £2m or more which is held by certain non-natural persons. Where the non-natural person has been subject to the ATED on a property it is also subject to the ‘ATED-related’ capital gains tax charge on a disposal of that property.
The ATED is to be extended to properties of lower values, so that as of 1 April 2015 enveloped residential properties worth £1,000,000 – £2,000,000 will be subject to the ATED, and from 1 April 2016 this will be further extended to properties in the £500,000 – £1,000,000 price bracket.
Disposals of these properties will also be brought within the ATED-related capital gains tax charge from 6 April 2015 for properties worth £1,000,000 – £2,000,000 and from 6 April 2016 for properties worth more than £500,000.
The 15% SDLT rate that applies to purchases of UK residential property by non-natural persons has also been extended to properties worth £500,000 or more with effect from 20 March 2014.
Capital gains tax for non-UK residents
What is happening?
Historically, individuals, companies and trusts not resident in the UK for tax purposes were outside the scope of capital gains tax (‘CGT’) so that their investment gains were not taxed. Since April 2013, personal use residential properties worth more than £2m have been within the scope of CGT if owned by certain non-natural persons.
The UK Government has now issued a consultation paper (28 March 2014) on a wider extension of CGT on UK residential properties to all non-UK residents. The consultation period closes on 20 June 2014.
There is no proposal to extend CGT to non-UK residents holding commercial properties in the UK or other assets.
What will it apply to?
The proposed charge will relate to all UK residential properties (that is, dwellings used or suitable for use as dwelling), regardless of value whether or not they are properties used by connected individuals or are rented out.
The new charge will not supersede the existing ATED-related CGT charge for properties that are subject to the ATED, but will operate in conjunction with it, taxing properties to which the ATED-related CGT charge does not apply. Given that the ATED-related CGT charge can apply to part of a gain, the interaction will inevitably be complex.
Are there any exemptions?
It is proposed that there will be some exemptions to the definition of residential property including certain types of student accommodation and care homes. As a general proposition the scope of the exemptions is restricted and in particular they do not extend to the ‘genuine businesses’ that were excluded from the ATED charge.
What about the main residence relief?
Gains arising on the disposal of a residence that has been an individual’s main residence during the period of ownership benefit from relief from CGT under the ‘principal private residence’ relief (‘PPR’). PPR relieves from CGT a proportion of gain equivalent to the part of the ownership period for which a property was the taxpayer’s main residence. Where a taxpayer has more than one residence, it is possible to elect for any one of them to be treated as the ‘main’ residence.
The consultation paper makes it clear that, although non-UK residents will be able to claim PPR, the government does not wish them simply to be able to elect for their UK property to be their main residence and proposes two possible approaches:
1. for the ‘main’ residence simply to be determined as a general question of fact; or
2. for the ‘main’ residence in any year to be the residence in which the taxpayer has spent the most time.
While the intent of these changes might be understandable, as the ability to elect freely would essentially disapply the new charge and mean that no tax was payable in many cases, their implementation will be complex. Both the proposed alternatives will raise considerable difficulties in implementation and will give rise to difficult evidential considerations.
It is also apparent that these changes will also apply to UK residents as well as non-residents and are likely to prove highly controversial.
Who will be chargeable?
The measures will apply to non-UK resident individuals, non-UK resident partners, non-UK resident companies and all types of non-UK resident trusts.
Widely held non-UK funds are likely to be exempt (as is the case for certain types of UK fund), but the position will be considered further as part of the consultation. Pension funds will not be affected.
What will the rate be?
Individual non-UK resident taxpayers will pay CGT at the same rate as UK residents – a maximum rate of 28% (an 18% rate applies for basic rate taxpayers) and non-UK resident individuals will also receive an annual CGT allowance (currently £10,900).
Corporates owning UK residential property will not simply be brought within the general charge to corporation tax (charged at a maximum rate of 21% from 6 April 2014) in respect of that property, but a specific CGT regime (the ‘tailored charge’) will be applied to them, at a rate of tax to be announced. Corporates (UK resident or otherwise) subject to the ATED-related CGT charge are taxed at 28%, but benefit from an indexation allowance.
When will it apply?
The consultation paper states that “The charge will come into effect in April 2015 and apply only to gains arising from that date.”
There is no reference to a rebasing of property values as at that date for the purposes of the new charge and it remains to be seen whether “arising from that date” refers to all gains on disposals from April 2015, or only gains accrued from April 2015. It is unfortunate that this is not made clear in the consultation document.
For comparison, it was originally proposed that the ATED-related CGT charge was to have applied to the total gain accrued during the whole period of ownership, but following consultation this was rejected due to the difficulty of establishing purchase costs and other relevant information. The ATED-related CGT charge now provides for a proportionate allocation of gains to pre-ATED and post-ATED periods, with the pre-ATED period giving rise to a proportionate exemption from the CGT charge.
How will it be levied?
While the consultation paper notes that some other jurisdictions rely on self-reporting, it is envisaged that a withholding tax will need to be applied in the UK to ensure compliance. As proposed, this would require the actual tax due to be paid by the vendor within 30 days to avoid the withholding which would presumably be applied to the gross sales proceeds. This will impose a significant compliance burden on vendors’ representatives and make the conveyancing process more complex and costly.
There is no proposal to include sales of shares in companies that own UK residential property within the scope of the new charge.
What should I do?
For the moment, nothing.
The consultation is open until 20 June 2014 and a detailed response and draft legislation is unlikely to be published before the Autumn Statement in December 2014.
The legislation envisaged by the consultation will be complex and, as with the ATED-related CGT charge, there are likely to be considerable changes to its scope and application of the proposals during that process. One of the key considerations will be whether there will be a rebasing of property values for the purposes of the new charge.
However, it is unlikely that the new CGT charge will be either deferred or abandoned and all non-UK resident owners of residential property (other than widely held funds) should prepare themselves for the payment of tax on a disposal after April 2015.