Residential property valued at more than £2 million, referred to as “High value residential property” that is occupied by individuals but held in a corporate-based structure or “non-natural person” could be subject to new tax charges from April 2013. The charges in question are an annual residential property tax (ARPT) and capital gains tax charges on properties caught by the ARPT. These charges apply regardless of whether there was any tax avoidance motive involved.
In particular, these new charges will affect:
- companies (regardless of whether UK or non- UK resident) that own UK residential property worth more than £2 million which is used by a shareholder who owns more than 5% of the company. Thus, even a UK trading company could be caught by these proposals if, say, a high value flat in central London is provided for the use of directors who own more than 5% of the company’s shares.
- offshore entities or structures set up to provide high value residential property to a UK-resident individual, such as partnerships with at least one corporate member and collective investment vehicles.
The new tax charges mean that any such structures may no longer be tax efficient, but there is only a limited window of opportunity to unwind (‘de-envelope’) them as this needs to be done by 31 March 2013 if these charges are to be avoided altogether. Whether de-enveloping or not right now is the right answer will depend on the cost/ benefits in the individual circumstances.
The annual residential property tax (ARPT)
ARPT comes into force on 1 April 2013 and, for 2013/14, will be charged on bands of value as follows:
A number of exemptions apply, including property development and rental or trading businesses, employee accommodation and farmhouses occupied by the farmer.
ARPT-related Capital Gains Tax (CGT)
From 6 April 2013 CGT will apply to gains accruing after 5 April 2013 on the disposal of UK residential property or assets that have been subject to the ARPT. This CGT liability will fall on the non-natural person owning the high value residential property, meaning that on gains due to increases in value over the property’s original cost or its value on 6 April 2013 CGT will be charged at the top rate of 28%, not at lower corporation tax rates.
Losses on ARPT-related gains will be ring-fenced and ARPT-related gains will not be eligible for relief by offset of any other reliefs or losses apart from ring-fenced ARPT-related losses.
What action should be taken?
Any person affected by these changes needs to urgently consider how these new rules will impact on them given their individual facts and circumstances to address the following questions.
- How will the new rules affect them both in terms of tax charges and compliance obligations?
- What are the costs/ benefits of ‘de-enveloping’ (for example, de-enveloping itself is likely to involve tax costs)?
- How should high value UK residential property be acquired in the future?
For further information contact Paul Barham or Chris Williams