Closing the door: residential property held in structures

In May 2012 the Treasury launched the consultation ‘Ensuring the fair taxation of residential property transactions’. It covers two elements of the package of measures announced in the Budget 2012. The consultation ?closed on 23 August. A summary of ?the responses and draft legislation is ?to be published in the autumn, with ?the legislation to be included in the Finance Bill 2013.

Complementary provisions

These provisions complement other provisions aimed at tackling stamp duty land tax (SDLT) avoidance, being the new SDLT rate of 15 per cent applying from 21 March 2012 to acquisitions by ‘non-natural persons’ of residential property costing £2m or more, an extension of the proposed general anti-abuse rule to SDLT, the threat of specific future anti-avoidance legislation to apply retrospectively from 21 March 2012, extended disclosure of tax avoidance schemes (DOTAS) for SDLT from September 2012, and a separate consultation on the SDLT sub-sale rules.

There are two key provisions in the May 2012 consultation:

• an annual SDLT charge, planned to apply from 1 April 2013;

• an extension of capital gains tax (CGT) to non-residents, planned to apply from 6 April 2013.

The annual SDLT charge is anticipated to raise £65m annually for 2013/14 onwards. In contrast the extension of CGT is only intended as a further deterrent to ‘enveloping’ of residential property, without raising significant additional tax revenue. This seems unnecessary and will add significantly ?to the UK compliance and advisory ?costs of structures affected, which might have been created for wholly unconnected reasons.

To add further complexity, the two charges have some similarities, but the extension of CGT applies more widely than the annual SDLT charge, and although both provisions are intended to apply to residential property, worth over £2m and owned by a ‘non-natural person’, the definition of ‘person’ is not the same.

The annual SDLT charge

As with other SDLT charges there is no graduation of the charge; it applies in full for properties whose values fall in the set ranges (see box). The annual charge will be indexed in line with the consumer price index.

The first charge period is for the year 1 April 2013 to 31 March 2014 and will be payable in advance for the year, with pro-rata rebates or payments where property is disposed of or acquired during the year.

What structures are caught?

A ‘non-natural person’ is a:

• company or other body corporate;

• collective investment vehicle;

• partnership where one of the partners is one of the above.

It applies to both resident and non-resident non natural persons. This is the same definition as applies for the new ?15 per cent SDLT rate.

There are three key exclusions:

• a company acting as a trustee;

• a charity (but not housing associations);

• a property development business, which has been operating for two years, where the property was purchased for the trade. This does not cover property investors.

This last point is again lifted from the definition for the new 15 per cent ?SDLT rate.??What property is caught?

The rules apply to freehold or leasehold interests in self-contained dwellings individually worth over £2m, owned on 1 April 2013 (and annually thereafter).

A self-contained dwelling includes any staff accommodation, guest houses, other buildings, gardens and grounds, however it does not apply to multiple dwelling properties, so if a block ten of flats is worth £10m, but each self-contained flat is worth £1m, then the charge will not apply.

There are also exclusions for residential care homes, student halls of residence, boarding school accommodation, etc.

Anti-avoidance provisions anticipate the splitting of freehold and leasehold interests to escape the charge. ?In addition, where a residential property is worth £2m or more, and is owned jointly by a ‘non-natural’ person and persons outside of the charge, the charge will apply in full.The valuation date in establishing whether a property is caught for the 1 April 2013 charge is 1 April 2012, if owned on that date, or acquisition if acquired later, and valuations will be submitted to the Valuation Office for review by the Revenue. Taxpayers will also be able to obtain clearance on values in advance of submission of their return. A valuation will only be required every five years. The early 1 April 2012 valuation date gives taxpayers time to establish whether they are caught and to plan accordingly.

The capital gains tax charge

The charge will apply to sales on or after 6 April 2013. The rate of tax has not yet been announced and will apply to the gain computed under normal capital gains tax rules (with no rebasing to 6 April 2013).

There will be some adjustment for situations where the property has not been residential throughout its ownership by the structure, and reliefs currently available for UK residents, such as principal private residence relief, may ?be in point (depending on the structure). Capital losses realised can be used ?against gains arising in the same year or future years.

The Treasury will review the interaction of these new rules with existing anti-avoidance rules catching capital gains in offshore structures, i.e sections 13, 86 and 87 TCGA1992 and with double taxation agreements.??What structures are caught?

These provisions will only apply to non-residents. A ‘non-natural person’ is a:

• company or other body corporate;

• collective investment vehicle;

• trustee and personal representative;

• club and association;

• any other entity in other jurisdictions which hold property (ie foundation);

• partner in partnership, who is one of the above.

There is only one exclusion, and that is for charities which are exempt from tax on their gains under section 256 TCGA1992.

What property interests are caught?

The rules apply to the sale of interests in self-contained dwellings individually worth over £2m. The sales caught include:

• leasehold;

• freehold;

• grant of an option; and

• sale of assets which indirectly represent interest in such property (the example given is of shares in a company where more than 50 per cent of the value is represented by UK residential property).

What next?

We need to allow the process to run its course. It might be that the professions can have significant and useful input to create more workable legislation. Aspects of the proposals subject to discussion include the definition of residential property and the structures to be caught.

That said, there is clearly a will within government to clamp down on what they perceive as abusive tax avoidance and to expect these proposals to be lost in the long grass is perhaps unrealistic. The consultation document clearly states that these proposals are aimed at situations where SDLT avoidance is in point.

What is of concern with this, as ?with any other anti-avoidance, is that ?the law of unintended consequences is likely to apply to catch structures created for non tax-avoidance reasons. The consultation does however identify this risk and invites suggestions on how to mitigate this. It is understood from correspondence between some bodies and HM Revenue & Customs that a rebasing may be available for the capital gains tax extension, and/or relief for properties being moved out of structures in advance of the charges being introduced. Such provisions would be sensible and welcomed.

Typically structures which could now be caught by the rules include:

• farming companies created many years ago when stamp duty avoidance was not in mind;

• companies created to protect assets from overseas estate devolution rules;

• trusts created to protect assets and their beneficiaries;

• companies and trusts put in place ?to protect the privacy of ?the occupiers.

?The tax costs of unwinding these structures may be significant, and the original reasons for creation of the structure may continue to be valid reasons for bearing the future tax ?charges. The consensus seems to be to put clients on notice, but not to undertake any unwinding of these structures until further progress on ?the consultation.

Finally, there have been comments in the professional press suggesting the annual SDLT charge was a first step to wider wealth taxes. Only time will tell whether this is how it develops, or whether it is a purely anti-avoidance focused measure.

Stephen Barratt is a director at accountancy firm James Cowper

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