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  1. Wealth
January 2, 2013

Update on Tax Liabilities for High Value Residential Properties

By Spear's

The Autumn Statement and Draft Finance Bill 2013 have removed much of the uncertainty surrounding tax liabilities on high end properties. Here’s an update on what the new annual residential property tax, and changes to capital gains tax and stamp duty could mean for you.

AFTER MUCH SPECULATION, the Chancellor’s Autumn Statement and Draft Finance Bill 2013 have at last removed much of the uncertainty surrounding future tax liabilities for high value residential property. This will hopefully help to dispel some of the wait-and-see attitude which has slowed the market this year and will encourage those buyers who have been sitting on the fence to be more active in 2013.

In fact, the impact on transaction volumes in 2012 has seemingly not been as great as some commentators have suggested: sales of £2m plus properties in London in the first 8 months of 2012 are about the same as in the corresponding period in 2011 according to Land Registry. This suggests that buyers have either been prepared to absorb the additional costs of buying via a corporate wrapper (referred to by HMRC as a ‘non-natural person’) or have elected to buy in their own name — and anecdotal evidence suggests the latter.

So what exactly has been confirmed? Well, most importantly, if you buy a residential property of whatever value in your own name then nothing has changed and none of the new taxes will apply to you. The changes will only apply if residential property is valued above £2m and is acquired by certain ‘non-natural persons’. Briefly, the new tax liabilities are as follows:

Annual Residential Property Tax (ARPT)

The Annual Residential Property Tax (sometimes referred to in the media as the ‘Mansion Tax’) will be introduced from April 2013 on a sliding scale basis (see Table 1 below). The actual charge is probably more of an irritant rather than a deal breaker as if you can afford a property at this price level (which may be a second home or one of many) you can probably stand this new tax hit which equates to less than 1 per cent of property value in every price band. The main impact will be on properties which are on or around the various price band thresholds, perhaps leading to some interesting discussions between owners and valuers about the true worth of properties.

There will be relief for various categories of ownership including property rental businesses, property developers and traders and farmhouses which are part of working farm businesses.

The Lib-Dem calls for a wide-ranging Mansion Tax on all properties with a value of £1m plus and the introduction of new high-end Council Tax bands have thankfully been thrown out — and rightly so as many long term owners of £1m plus homes will have bought them for considerably less, are not HNWs and are relying on built up equity in their property to boost flagging pension pots.

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Capital Gains Tax

Full details surrounding the introduction of Capital Gains Tax liability for properties held within offshore corporate wrappers are less clear and will not be confirmed until January. It appears that the standard rate chargeable will be 28 per cent with a tapering relief for gains where the property is worth just over £2 million. The impact of this measure was potentially far more significant as if applied retrospectively this could involve serious amounts of money. However, it appears that this will not be the case and the tax will apply only to gains accrued from 6th April 2013.

The good news is that the same exemptions as applicable to the ARPT will apply to this extension of CGT liability. The slightly less good news is that the Government is also considering bringing UK ‘non-natural persons’ within the scope of this tax.

Stamp Duty Land Tax (SDLT)

There has been some conciliation from the Government here in that there will be relief from the 15 per cent SDLT charge for certain categories of owner, including businesses involved in the letting, trading or developing of properties, traders making dwellings available to the public, dwellings for occupation by certain employees and farmhouses which are part of working farm businesses. Those qualifying for relief will be charged the standard rate applicable for £2m+ properties – i.e. 7 per cent.

As announced in Budget 2012, legislation will be introduced to reform the SDLT rules for the transfer of property rights. The new legislation aims to ensure that SDLT will generally be charged only on the end purchaser of the property where a purchaser immediately sells a property to another party.

These measures form part of a wider offensive against tax avoidance and the Government has allocated additional resources to target what it regards as unacceptable tax abuse. The message for buyers of high value residential property not wanting to risk attracting the unwelcome attention of HMRC is check carefully the most appropriate method of acquiring and holding residential property valued at over £2m.

Will the introduction of these new tax liabilities affect demand for prime UK residential property going forward? This seems unlikely even for foreign buyers given the long standing attractions which the UK, and London in particular, have to offer.

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