Alert March 20, 2014

Residential Property in the United Kingdom – Extension of Anti-Enveloping Rules to Residential Properties Worth More Than £500,000


The existing United Kingdom tax rules designed to discourage the “enveloping” of residential properties worth more than £2m in certain vehicles are to be extended to lower value properties.  The changes will take place in phases, starting today with the imposition of SDLT at 15% on acquisitions and concluding on 6 April 2016.  When the changes have been fully implemented, they will extend to residential properties worth in excess of £500,000.  It is expected that the existing exemptions will be preserved.

The following is of interest to investors in and developers of residential property in the United Kingdom; to banks and other financial institutions that may hold an interest in residential properties following exercise of security or, prior to exercise of security, as part of “alternative financing arrangements”; to organisations that provide residential accommodation to staff, for example expatriate executives; and to anyone else that holds interests in United Kingdom residential property.

What’s This About?

The UK recently implemented three measures designed to discourage the holding of residential properties through certain vehicles[1] (“Wrappers”), a practice known as enveloping.  These measures are a 15% rate of stamp duty land tax (“SDLT”) on acquisition of a property by a Wrapper ("ATED"); an annual tax based on the value of the property held within a Wrapper; and 28% capital gains tax ("CGT") on disposal of a property by a Wrapper (the “Anti-Enveloping Rules”).  As originally introduced, the Anti-Enveloping Rules broadly only affected individual residential units with a value of over £2m.

What Is Happening Now?

The property value threshold at which the Anti-Enveloping Rules will apply is being reduced.  The reduction will take place in phases until 6 April 2016 as indicated on the timeline below.  The changes start today with the application of SDLT at a rate of 15% to acquisitions of properties for more than £500,000, although generally speaking the reduced threshold should not apply where contracts have been exchanged before today.

chart 03202014

What About Residential Properties Held On A Commercial Basis?  Aren’t There Exemptions For This?

The Anti-Enveloping Rules are subject to a range of specific exemptions designed to ensure that residential properties held for most commercial purposes will not be caught by the rules e.g. as investments or for development on a commercial basis.  It is expected that these exemptions will continue to apply to the Anti-Enveloping Rules as extended.  Note that although the exemptions are designed to cover most types of commercial activity involving residential properties, they are all subject to specific rules and carve-outs and their availability must be determined on a case-by-case basis.

[1] Companies, partnerships which have at least one member which is a company, and collective investment schemes.