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Pushing the envelope?

What do recent changes to high value residential property tax mean in reality? Lisa Benosiglio explains

8 April 2013

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After much publicity about wealthy individuals avoiding stamp duty land tax (SDLT) when they bought high value residential properties (over £2m) held by offshore companies, tax changes were announced in the 2012 Budget. Where the shares in the offshore company were bought rather than the property itself, no SDLT would be payable.

While this is still the case (and perfectly legal), the new measures were introduced to make holding property in companies unattractive and expensive, and to encourage owners to extract the properties from the companies into their own names. It is often referred to as "de-enveloping".

The government did not opt for the obvious approach of introducing SDLT on the purchase of shares in property-rich companies. Instead, the changes relate to three separate measures and add yet more complexity with the introduction of a new tax.

Welcome relief

Annual tax on enveloped dwellings (ATED) was introduced on 1 April 2013 and will apply to "non-natural persons" who hold high value residential property. Initially, the charge will range from £15,000 to £140,000. The lower charge will apply to properties worth over £2m and up to £5m while the highest charge will apply to properties worth over £20m. ATED will be based on the market value of the property on 1 April 2012 or the date of acquisition if later, and this will apply for the first five years of the charge.

The valuation may be self-assessed. A professional assessment is not strictly required, although it may be prudent where the value is around the thresholds of each banding - if HMRC successfully challenge the valuation and the ATED charge is greater, penalties will apply.

HMRC has taken into account the huge number of responses to its consultation last summer meaning that most bona fide businesses involved with high value residential property should be relieved from the new ATED charges.

While the reliefs are welcomed, an annual return still must be submitted to claim the relief, although an accurate valuation may not be required.

Out of synch

The 15 per cent rate of SDLT came into effect on 20 March 2012. It applies to acquisitions of single residential dwellings worth more than £2m by non-natural persons. A relief applies where a developer with at least a two-year history acquires the property. From royal assent of the Finance Bill 2013, the two-year requirement will be dropped and further reliefs will be introduced. This will align the reliefs to those that apply to the ATED.

It is disappointing that the government has not found a way to align the introduction date of the new reliefs for the 15 per cent rate of SDLT with that of the ATED. It means that, until royal assent, genuine property businesses may still be subject to the 15 per cent rate of SDLT but relieved from ATED. We are aware of many situations where genuine property businesses have been required to reassess, pull out of or delay a transaction date because of this anomaly being left unfixed, albeit temporarily.

Capital gains tax (CGT) at a rate of 28 per cent will apply to gains accruing from 6 April 2013 on disposals of residential properties for over £2m by non-natural persons on or after 6 April 2013. The charge will only apply to the extent that the vendor was subject to the ATED. The charge will be tapered for certain sales that just exceed the £2m-threshold to ensure that the tax payable does not distort the sales price.

Expensive alternative

How investors wish to plan around the new rules will depend upon a number of factors, such as personal preferences, inheritance tax exposure, external or connected borrowing, residence and domicile status of the ultimate beneficial owner and the need for confidentiality. Every case will depend upon its own facts and circumstances and there is no one-size-fits-all solution - it will be necessary to fully appraise the potential application of the above measures.

In some cases, "de-enveloping" a property will trigger substantial SDLT and CGT charges (for example, where the owner is UK resident), meaning that it may be less costly to pay the ATED each year than to restructure the property ownership. Therefore, despite the introduction of the ATED, and widening of CGT, many enveloped properties will remain in situ as the alternative is simply too expensive.

Lisa Benosiglio is tax director at BDO