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  1. Wealth
April 3, 2017

Why UK’s property tax reform is a step backwards

By Spear's

Current tax rules, developed over the past 200 years, are out of touch with the reality of today, but the government adding layer upon layer of new tax rules is not helpful either, writes Ceris Gardner

The Oxford English Dictionary may have decided its word of the year for 2016 was ‘post-truth’ (an Orwellian idea and an ugly word), but for lawyers and tax professionals another hideous word has entered the lexicon: ‘de-enveloping’.

‘De-enveloping’ was a term coined by the government in 2013, with the introduction of ATED (the annual tax on properties held, or ‘enveloped’, by companies), and wrongly suggested — then as now — that there was an unsavoury whiff of artificiality about these arrangements. Since 2015, with the announcement that inheritance tax will also be visited on properties held by companies, ‘de-enveloping’ has acquired new currency. It is thought that around 100,000 properties in the UK are owned by foreign companies, and the process of alerting their owners to the change, and extracting the properties from the companies, has not been made simpler by the fact that draft legislation (of only some of the rules) was first published in December, leaving just four months to arrange many complex transactions.

As we know, the past five years have been marked by an unprecedented wave of reforms to the taxation of UK residential property. A major target of these reforms has been non-UK investors using corporate structures to purchase and hold high-value residential property. It has until now been common for non-UK investors to invest in UK residential property via a foreign company. The government became determined that this was being used to avoid stamp duty land tax: a future purchaser would have the opportunity to purchase the company, rather than the property, and thereby escape the SDLT that would be payable on a direct acquisition of the property. Not so, the professions replied en masse to a consultation. Clients tend not to buy second-hand companies (because of the risks of buying an unknown history), but form new ones to buy the properties, paying full rates of SDLT. They do it for confidentiality reasons, and because owning a foreign company is outside the scope of inheritance tax. This self-administered application of shot to foot led directly to the introduction of ATED in 2013 — supposedly to compensate the Treasury for the loss of opportunity to impose IHT on these properties — and now to the imposition of IHT on the properties (without ATED being repealed).

The government has declared that ‘the current rules… developed over the past 200 years, are complex and poorly understood, and do not reflect the reality of today’s more integrated world’. It’s hard to disagree, but adding layer upon layer of new tax rules helps no one.

Taxing immovable assets at 40 per cent on death is a very 19th-century way to address a modern-day problem. It is harder to tax Bitcoin, or the UK-source profits of Starbucks, than the bricks and mortar of a wealthy family; and it is hard to escape the conclusion that successive governments would rather risk the goodwill of wealthy foreign families than that of global corporations. Post-Brexit, you might imagine we would want the goodwill of both.

All this reminds me of the observation by Sellar and Yeatman, in 1066 and All That, that while Gladstone had spent his declining years trying to guess the answer to the Irish Question, whenever he was getting warm the Irish secretly changed the question. Similarly (or so it feels), whenever tax advisers think they have understood and adapted to the government’s latest approach to the taxation of non-domiciliaries, the government simply changes its target.

Which brings me back to de-enveloping and residential property. It is ironic that the very ‘problem’ the government set out to curtail in 2012 — the imagined sale of property-owning companies free of SDLT — is still possible. As SDLT rates have sky-rocketed over the past fifteen months, the intentionally punitive rate of 15 per cent SDLT for companies buying property has also been imposed on anyone buying a second home (or buy-to-let) worth £1.5 million or more. The potential to buy a company, rather than the property, and the consequent saving may outweigh the risk of buying the company’s history; and although ATED applies to second homes, it does not to buy-to-lets; and finally, inheritance tax is the same whether the property is held in a company or personal names. So for some investors, there is no real disincentive to using a company. Ironically, the government’s piecemeal policy-making has created a market which didn’t exist.

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The post-truth version of all this probably merely states that wealthy people ought to ‘contribute their fair share to society’. But for a homeowner who doesn’t live in the UK, it’s hard to see why giving the British state 40 per cent of his house when he dies
is a fair bargain.

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