Company ownership of UK residential properties: the tide turns

New rules mean that a careful review will now be needed in respect of company ownership of UK residential properties worth over £2m.

There has been much focus in recent months on the well-trodden path used by many international individuals and families of holding high value UK residential properties in the name of a company (sometimes referred to as ‘enveloping’). This used to provide a number of tax benefits, (including a much lower rate of stamp duty on purchases and possible capital gains and Inheritance tax advantages for international people), as well as the advantage of confidentiality.

In the 2012 Budget, these structures came firmly within the Chancellor’s sights, with the announcement of an immediate Stamp Duty increase to 15% on UK residential properties worth more than £2m purchased through a ‘Non-Natural Person’ (NNP). Broadly speaking, NNPs include companies, LLPs where there is a corporate partner, and some collective investment schemes.

More worryingly, though, for those with existing companies holding UK residential property, the Revenue also announced a consultation on the introduction of further tax charges, including an annual property charge and an extension of the scope of capital gains tax (CGT) on properties held by NNPs.

Until very recently, we were unable to confirm any details as the Government were still considering the responses to Consultation, but on 11 December some of the draft legislation relating to the new rules was published. This provides much further clarity and some welcome reliefs as against the previous position. We still await the precise detail in the form of further explanatory material and the detail of the CGT legislation. However, it is now possible to give an overview of the factors to be taken into account.

The draft legislation confirms that new tax charges will be imposed on UK residential properties valued at over £2m which are held through an NNP. The key points include the following:-

An Annual Residential Property Charge (ARPT) will be introduced for all residential properties over £2 million owned by NNPs. The charging structure is as follows:-

Value of property and charges
£2m – £5m: £15,000
£5m – £10m: £35,000
£10m – £20m: £70,000
£20m+ – £140,000

• The ARPT will be handled by self assessment, with owners needing to file a return each year based on an estimated value of their property (or a professional one if within 10% of one of the band thresholds).

• An extension of the scope of Capital Gains Tax to NNPs where there is a disposal or sale of residential property for £2 million or above.

• The new rules will come into force on 1 April 2013 and so for those who may wish to review their existing structures, time is of the essence. There was, however, some good news in the draft legislation:

• There had been concern that trusts would be treated as NNPs for the purposes of the new CGT charge but this has been dispelled in the draft legislation, and so properties held directly in non-UK trusts (with no intermediate company) will not automatically be subject to the new CGT charge as had been feared.

• The new CGT charge will only apply to gains on the property arising after 6 April 2013.

• There are a number of welcome new exemptions to the new charges. These have the effect that the new tax charges mentioned above will not apply in a range of circumstances, including:
– residential property which is rented to third parties on commercial terms
– employee accommodation
– property developers and dealers

Although the new rules will not be quite as draconian as originally feared, this does still represent a major new tax regime for those affected. Those who hold through NNPs UK residential property valued at £2m or more (and indeed properties which are near that value and which may increase in value over the £2m mark in future) will need to consider very carefully whether to live with the new rules or to carry out some re-structuring. In many cases, any re-structuring will need to be carried out before the end of March 2013 and so there is limited time for action.

To discuss any of the issues raised, please contact david.goepel@edwincoe.com, T: 020 7961 4185 or sean.bannister@edwincoe.com, T: 020 7691 4135.

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