The following is of interest to investors in and developers of residential property; to banks and other financial institutions that may hold an interest in residential properties following exercise of security or as part of certain sharia compliant “alternative financing arrangements”; to organisations that provide residential accommodation to staff, for example for expatriate executives; and to anyone else who holds interests in residential property.
In the March 2012 budget the Government announced a package of tax measures to discourage the “enveloping” of residential properties with a value of over £2m. The first of these measures, imposing stamp duty land tax (“SDLT”) at 15% for the purchase by certain entities of residential property for more than £2m, took effect from 21 March 2012.
Since then, the Government has been consulting on two additional measures that were announced in Budget 2012. Further details of these measures were published earlier this week. First, it is proposed that tax would be charged annually based on the value of higher value residential properties held in certain legal entities. It is proposed that this “annual residential property tax” will come into effect on 1 April 2013. Second, it is proposed to extend the scope of capital gains tax to catch sales or other disposals of higher value residential properties by certain legal entities that would not otherwise be subject to capital gains tax. It is proposed that this extension of the capital gains tax regime will come into effect on 6 April 2013.
A range of reliefs will be available for all three measures, and these will be much wider than the existing limited relief from the 15% SDLT rate available to some property developers.
What was announced in Budget 2012?
In Budget 2012 the Government announced a package of measures to discourage the “enveloping” of higher value residential properties (broadly, individual residential units with a value in excess of £2m). “Enveloping” refers to the practice of owning properties through certain legal entities, such as companies (an “Envelope”). Enveloping may be done for a variety of reasons, but one effect of enveloping is that a better price may be negotiated on a sale by selling the Envelope, containing the property, rather than by selling the property itself. The rationale for this is that the buyer would be expected to save SDLT by buying the Envelope rather than buying the property directly, and may therefore be prepared to pay a higher price for the Envelope than it would have been prepared to pay had it purchased the property itself and paid SDLT. It is this SDLT benefit with which the Government is concerned, but the various anti-enveloping measures announced in Budget 2012 apply regardless of whether enveloping a specific property is motivated by obtaining this SDLT benefit.
In Budget 2012 three anti-enveloping measures were announced:
- SDLT is charged at 15% on the purchase of residential properties by certain “non-natural persons” where the consideration exceeds £2m. This measure is already in effect.
- A new “annual residential property tax” (“ARPT”) is to be imposed on “non-natural persons” owning residential property with a value in excess of £2m.
- An extension to the capital gains tax (“CGT”) rules so that “non-natural persons” who would not otherwise be subject to CGT will be subject to CGT if they sell or otherwise dispose of a residential property with a value of more than £2m.
The first of these measures, the new 15% SDLT rate, took effect for transactions with an “effective date” on or after 21 March 2012. Implementation of ARPT and the extension of the CGT regime were delayed until next year in order to allow the Government to consult with interested groups on the precise form of the new rules.
What was announced this week?
Draft legislation has been published providing details of ARPT, including a range of reliefs.
Legislation has also been published providing relief from the 15% rate of SDLT in similar circumstances to those where a relief from ARPT will apply, so that SDLT will normally be payable at 7% where relief is available (one of the ARPT exemptions relating to properties that are conditionally exempt from inheritance tax will not apply for SDLT purposes). The SDLT relief will be subject to a clawback rule, under which relief may be clawed back in certain circumstances where the use or occupation of the property changes.
Some further details of the extension to the CGT regime were also published. In particular it is proposed that the extended CGT charge will not apply where an exemption from ARPT is available, but we will have to wait until January 2013 for full details of the extended CGT regime.
Who will it apply to and when will it start to apply?
ARPT will apply to certain non-natural persons that, on 1 April 2013, own a dwelling worth more than £2m valued at 1 April 2012 or, if later, valued at the date of acquisition or part-disposal of the dwelling by the non-natural person. Properties are to be revalued every five years: note that the first valuation date of 1 April 2012 is prior to the tax taking effect on 1 April 2013.
“Non-natural persons” will cover the same categories of “non-natural persons” to which the 15% SDLT charge applies. Broadly speaking, this definition covers companies, partnerships of which at least one member is a company, and collective investment schemes.
What rate will it be charged at?
The tax will be charged according to the value of the property as follows:
Property value Charge in 2013-14
Starting on 1 April 2014, the charges will automatically increase each year in line with the Consumer Price Index of the previous September. However, the intention appears to be that the band thresholds will remain static.
Are there any reliefs?
Various reliefs have been announced providing exemption in the following circumstances:
- Property Development Businesses: dwellings held for the purpose of a property development trade and not occupied at any time by a connected person;
- Property Rental Businesses: dwellings held for the purpose of letting to third parties for rent on a commercial basis and not occupied at any time by a connected person;
- Property Trading Businesses: dwellings held for the purpose of a trade of buying and selling property and not occupied at any time by a connected person;
- Properties which are run as a business: properties open to the public with access to the interior for at least 28 days per year on a commercial basis, as a venue, location or to provide accommodation or other services;
- Dwellings held to provide employee accommodation: property held for the use of employees (with less than a 5% interest in the employer), for the employer’s commercial purposes. Relief is also available, subject to similar criteria, for properties held for the use of partners in partnerships; and
- Farmhouses: for situations where a working farmer occupies a farmhouse connected to the farm land for the purposes of farming the land.
In addition to the draft legislation published this week, further draft legislation is expected to provide relief for financial institutions that acquire dwellings on enforcement of security and that provide “alternative finance arrangements”, for certain charitable, diplomatic and publically owned properties and for properties that are conditionally exempt from inheritance tax.
Reliefs from 15% Sdlt Charge
The current rules for the 15% SDLT charge provide for a very limited relief for property developers. It is proposed that relief from the 15% SDLT rate on acquisition will be available in similar circumstances to those where one or more of the exemptions from ARPT on ownership will be available going forward, other than the relief for properties that are conditionally exempt from inheritance tax. The relief for property development businesses will not be subject to the requirement for a two year track record that applies to the existing form of the relief. The effect of claiming relief will normally be that SDLT is chargeable at 7% instead of 15%.
Importantly, relief will be subject to a clawback rule. SDLT relief given on acquisition may be “clawed back,” so that additional SDLT will become payable, if within three years of acquisition the use or occupation of the property changes in a manner inconsistent with the relief.
These changes will take effect when Finance Act 2013 is enacted, which is expected to be in Summer 2013.
Extension to CGT Regime
Who will it apply to and when will it start to apply?
Under current rules, owners who are not resident or ordinarily resident for tax purposes in the UK are not generally subject to CGT on a disposal of a property owned for investment purposes, unless certain specific anti-avoidance rules apply. In relation to dwellings worth more than £2m owned by certain “non-natural persons” to which the new ARPT applies, it is proposed to change this general rule so that CGT will be payable on a sale or other disposal of the property by a “non-natural person” who isn’t resident in the UK, where that sale or other disposal takes place on or after 6 April 2013.
What rate will tax be charged at?
Tax will be charged at 28%.
Do any reliefs apply?
The same reliefs as those that are to be available from ARPT (see above) will apply, but the mechanism by which reliefs will be given is different. It is stated that the relief will operate by ignoring periods for which relief from ARPT applied when the gain that is subject to CGT is calculated, but we await further clarification of what, exactly, this means.
In addition, a “tapering relief” will apply with the purpose of removing the incentive to sell properties that are worth a little more than £2m for less than £2m in order to maximise the after-tax proceeds by falling outside the tax.
Is anything else likely to change in this area?
The Government has announced that it is considering further extending the scope of CGT so that the extended rules described above would apply not only to non-UK resident “non-natural persons,” but also to UK resident “non-natural persons” notwithstanding that UK resident non-natural persons would normally already be subject to corporation tax.
What happens next?
The Government has invited comments on the draft legislation published earlier this week. The closing date for comments will be 6 February 2013.
Additional draft legislation is to be published shortly addressing certain specific aspects of ARPT and the 15% SDLT rate that are not addressed in the legislation published earlier this week.
Detailed draft legislation dealing with the extensions to the CGT regime is expected in January 2013.
Final legislation on all three measures will be included in Finance Act 2013, which we expect to be enacted in Summer 2013.
If you wish to discuss the developments discussed in this bulletin, please contact any of the following or your usual Goodwin Procter contact.
Ben Eaton, Partner, Tax
Joe Conder, Partner, Real Estate Transactions
David Evans, Partner, Corporate Real Estate and Funds
Samantha Lake Coghlan, Partner, Corporate Real Estate and Funds