The Government recently announced far-reaching stamp duty land tax (SDLT) changes and proposed provisions to tackle tax avoidance. The initial announcement was made in March’s Budget, where the significant new annual taxation on high value properties held by “non-natural persons” was put forward.

Whilst many of the changes to SDLT are already in full effect, the annual charge, together with the extension of capital gains tax (CGT) to property sales by non-resident, non-natural persons are only scheduled to come into force in April 2013 after a full consultation over summer 2012. In an effort to maintain consistency with the 15% stamp duty rate for non-natural persons already in force, both the annual charge and CGT extension will only apply to residential properties sold for £2 million or more.
The form of the consultation was announced on 31 May 2012. The paper, ‘Ensuring the fair taxation of residential property transactions’, sets out the Government’s rationale, initial taxpayer concerns and elaborates in greater detail the operation of the proposed legislation.

Annual charge – Overview

• Will apply to purchases of £2m+ residential properties by non-natural persons (including companies and collective investment vehicles but not trusts, bona fide property development businesses or charities).
• To benefit from the property development exclusion, a ‘bona fide property development business’ must have been operating for over 2 years and the property must have been purchased with the intention of re-development and re-sale.
• Property valuations will be self-assessed, with the ‘market value’ on 1 April 2012 (or the date of later purchase) being key in determining whether the property is caught by the charge. This valuation will endure for the 5 years after 1 April 2013, after which time the property will need to be re-valued.
• The annual charge will be linked to inflation via the Consumer Price Index and uprated each April.

• Property Value	Annual Charge for 2012-2013
  £2m – £5m	£15,000
  £5m – £10m	£35,000
  £10m – £20m	£70,000
  £20m+	£140,000

CGT Extension – Overview

• CGT will be extended to disposals of £2m+ residential properties by non-UK resident, non-natural persons, non-resident persons. This includes companies, trustees (apart from bare trustees), collective investment vehicles and personal representatives but current CGT-exempt charities will be outside the scope of this charge.
• It is proposed that offshore companies that currently pay corporation tax will have any gain arising from a disposal of UK residential property charged to corporation tax instead of CGT.
• CGT will apply irrespective of the current use of the residential property.
• Rates of CGT will be announced by the Chancellor in Budget 2013.

In order to ensure the provisions are as water-tight as possible, the consultation paper also recommends that they be supported by the application of general anti-avoidance rules (GAAR).

The consultation will be open for 12 weeks, with the Government inviting views on, inter alia:

• who should be caught by the annual charge and predictions as to the impact on those groups affected;
• whether the CGT extension is an effective way of ensuring that everyone pays their fair share of tax and whether such an approach is likely to work in practice; and
• whether the measures have the potential to lead to any unintended negative consequences contrary to the Government’s ‘fair taxation of residential property transactions’ aim.

The consultation will close on 23 August 2012, following which the Government will have an opportunity to take on board opinions and recommendations before publishing a response and draft legislation in the autumn.

In light of these new and proposed provisions, it is imperative that clients, both resident and non-resident, review existing structures which hold UK property. Going forwards, we do not believe there will be a ‘one size fits all’ best structure to hold UK property. There are challenges to carrying out restructuring, as it would be difficult to restructure in many cases for UK resident clients, without triggering any UK tax consequences. However, there are still possibilities of mitigating the tax consequences of restructuring, and we recommend expert advice is sought.

For individuals who do not need to restructure now, we recommend waiting to see the outcome of the Government Consultation. One of the points advisors are attempting to make clear to the Government is the potential disproportionate cost to clients of restructuring, particularly where the property has been held in a structure for a long period of time. There has not been any announcement in respect of the possibility of “rebasing” property values held in structures to current market value for capital gains tax purposes. This means the proposed changes would effectively result in a “retrospective” tax charge for owners/beneficiaries of such structures in relation to historic gains.

Please contact Glen Atchison, David Scott or Dhana Sabanathan in the Tax and Private Client Groups if you have any queries about this briefing note.

4 July 2012