The government isn’t giving you or your lawyers much time to adjust to its punishing new stamp duty rules, say Bart Peerless and Piers Master of Charles Russell. Ready? Set? Go!
The government isn’t giving you — or your lawyers — much time to adjust to its punishing new stamp duty rules, say Bart Peerless and Piers Master of Charles Russell. Ready? Set? Go!
THE GOVERNMENT IS cutting it remarkably fine. After the announcement in March’s Budget that it was about to impose a raft of taxes on HNWs with large houses, it seems likely that individuals will have only four months to work out how the taxes affect them — and to take action.
The ostensible purpose of the tax changes affecting UK residential property worth over £2 million is to prevent people avoiding stamp duty land tax (SDLT) by holding the property through a non-UK company. The changes are also intended to encourage the dismantling of existing structures. However, the impact of the proposed changes is likely to be much wider. Given that the draft legislation probably won’t be published until 11 December — after George Osborne’s pre-Budget statement — and the changes are due to come into force in April 2013, advisers will have to work quickly.
From 21 March, SDLT increased from 5 to 15 per cent on purchases by companies and certain other kinds of entities of single residential properties for over £2 million. The rate on acquisition by individuals is 7 per cent.
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From 1 April 2013, there will be a new annual charge on single residential properties worth over £2 million held by UK and non-UK companies and certain other kinds of entities (see table). The charge will increase annually in line with the Consumer Prices Index, although the bandings will not be increased. For the five years from April 2013 the annual charge will normally be based on the market value of the property on 1 April 2012.
FROM 6 APRIL 2013, there will also be a new capital gains tax (CGT) charge on disposals of valuable UK residential properties held by non-UK resident companies. No ‘re-basing’ to April 2013 values is currently envisaged. This CGT charge might also apply to non-UK resident trustees (but not nominees).
The appropriate steps in each case to mitigate the effects of the new charges will depend on the reasons why the residential property is held by a company. In some cases the company shares are held by a non-UK resident trust. Such structures are used to take the property outside the scope of inheritance tax (IHT) otherwise normally applicable on death, rather than to avoid SDLT. Alternatively, the property might be held in a company without a trust. In either case, many such structures will be too expensive as they will attract the new charges. Dismantling such structures, despite tax costs of doing so, might be more tax-effective overall.
A property could instead be held in an individual’s own name, taking it outside the new annual charge. CGT on subsequent sale would depend on the owner’s tax status. Although IHT would apply, it can usually be mitigated by life cover or secured borrowing. Alternatively, the individual could give the property to his/her children, especially if they are non-UK resident.
For confidentiality, the property could be held outside a company by non-UK resident trustees or by a nominee. Although the new CGT charge might be an issue and IHT would apply, the new annual charge would not.
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For clients wanting to retain a company and trust structure, there may be options for mitigating future tax charges, for example by rebasing the value of the trust property for CGT before the new charges commence.
These strategies generally require existing structures to be dismantled. If the company is based in the UK, this could be expensive in tax terms, depending on the shareholders’ UK tax status. For non-UK-resident, non-domiciled shareholders, dismantling the structure should not be difficult if done before the new charges commence. Possible tax charges in other jurisdictions would need to be checked. Tax costs of dismantling structures must be weighed against other considerations, including privacy and family succession. The right answer in each case depends on the circumstances.
Moreover, changing structures with multi-jurisdictional elements can be complex and the time-frame may be extremely narrow. In some cases it might not be possible to make the changes in time.
It is hoped that some of the most unjust aspects of the proposed legislation are changed as a result of the government’s consultation — especially those that effectively impose retrospective or retroactive tax — and that more time is allowed before the legislation commences. In practice that means a delay until at least April 2014. The government showed its willingness to delay implementing the statutory residence test until concerns were resolved, so hopefully it will do the same here.
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