On 11 December 2012 and 31 January 2013 draft legislation was published following the consultation paper “Ensuring the fair taxation of residential property transactions”. We now know the scope of the new annual charge and capital gains tax rules. The 11 December draft legislation announced exemptions which mean that neither the annual charge nor capital gains tax will be as far reaching as originally feared.
The rules apply to residential property valued at £2m or more which is owned by a ‘non-natural person’ (‘NNP’) unless a relief applies. Such NNPs will be liable to the annual residential property tax (‘ARPT’) and will come within the scope of the new capital gains tax charge (if they are within the scope of the ARPT).
The reliefs are available to landlords who will rent to genuine third parties, property developers and others who use the property in a business. The effect of this is that the ARPT and capital gain tax charge are likely only to apply to owner occupied residential properties worth more than £2m.
Stamp duty land tax (‘SDLT’) on purchases of residential properties by NNPs falling within ARPT will remain at 15 per cent. Purchases by NNPs that fall within one of the reliefs and are, therefore, outside ARPT will pay 7 per cent SDLT. However, the amendments setting out the reliefs will only be effective from the date of Royal Assent of the Finance Bill 2013 and so there will remain a period of time during which the existing rules will continue to apply.
Where the reliefs are available (subject to them being enacted), a company structure will remain the most attractive option for most purchasers.
Set out in the table below are a number of available options for the purchase of high value residential property by those who wish to occupy the property themselves or make it available to their family.
The mitigation of an inheritance tax exposure
For many foreign purchasers outright ownership will be attractive, but will give rise to UK inheritance tax exposure. However, this exposure to UK inheritance tax may be mitigated in a number of ways:
- Taking out commercial borrowing secured by mortgage on the property to depress its net value below the current £325,000 threshold above which inheritance tax is payable;
- Connected party borrowings may also be used in the same way – however, it is not clear whether connected party borrowing may be effective where there is no other commercial purpose to the transaction or where the owner has created the loan himself;
- Life insurance may also be purchased to cover a medium term exposure to inheritance tax; and
- Owners can self-insure, relying on a sale of the property prior to death.
The restructuring of existing structures
If high value residential property owned by an NNP falls within the scope of ARPT and therefore the new capital gains tax charges, the structure should be reviewed to determine if it remains cost effective and, if not, whether steps should be taken to restructure.
Key in any restructuring is the transfer of ownership of the property by the company. Two options can be considered for this.
Liquidate the company
The company is liquidated and the property is distributed to the shareholders. The liquidation is treated as a disposal of the company shares at market value but this will only be relevant for UK tax purposes if shareholders or the settlor/beneficiaries of a trust owning the company are UK tax resident.
A charge to SDLT will arise if borrowing is secured on the property at the time of liquidation, as a transfer subject to a debt will be treated as chargeable consideration for the purposes of SDLT. If there is borrowing secured on the property then the security should be discharged before a transfer on liquidation takes place.
Turn the company into a nominee
The company transfers the property to the company’s shareholders at no consideration. This may not be permitted under the law of incorporation of the company. If the company was funded by a loan, the transfer would leave the company with a debt but no assets, which may not be permitted under the law of incorporation of the company.
The benefit of this route is that it is quick and can be done without liquidating the company. The name on the register at the Land Registry will remain the same. The ‘transfer’ does not trigger SDLT, but is a transfer from the company to the shareholders and can, therefore, give rise to UK capital gains tax, which could become taxable on a UK resident beneficiary.
|Outright ownership||Offshore company held by an offshore trustï€ª||Direct ownership by offshore trust (with no holding company)ï€ª||Non-UK partnership with individual partners|
|SDLT on purchase||7%||15%||7%||7%|
|ARPT||None||Between £15,000 and £140,000 per annum||None||None|
|Capital gains tax||None for non-UK residents or UK residents who benefit from the principal private residence relief||Immediate charge to CGT at 28% on sale of property. No charge for sale of shares in the company||None||As for outright owner|
|Income tax||No issues as occupied by owner||UK resident occupiers will need to take care to avoid a benefit in kind charge||None||As for outright owner|
|UK Inheritance tax||Net property value potentially subject to tax at 40% on death of owner regardless of residence or domicile.||No liability to IHT for a non-UK domiciled settlor.||Charge at up to 6% on the net value of the property every ten years and on a distribution of the property. Potentially subject to tax at 40% on death of settlor of trust if he is the beneficiary||As for outright owner, unless it can be successfully argued that the partnership has a non-UK situs.|
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