High value residential property – UK companies do not escape charge

UK companies disposing of high value residential property will now be subject to capital gains tax at 28%, following the publication of draft legislation on 31 January 2013.

Background

In Budget 2012, the Government announced, a series of anti-avoidance measures targeting the practice of holding high value (£2 million or above) UK residential property within offshore structures.

The aim was to bring high value residential properties held within corporate “envelopes’’ back into the SDLT charging regime, by introducing legislation which penalised such structures.

Proposed measures included:

  • The introduction of an Annual Residential Property Tax (annual charge), to be levied on non-natural persons holding high value UK residential property,
  • The introduction of a 15% rate of SDLT payable on purchases of residential property over £2 million by non-natural persons, and
  • The extension of the scope of the CGT regime to apply to disposals of high value residential property by non-natural persons.

Broadly, non-natural persons are companies, collective investment schemes and partnerships whose partners include the same.

Extension of the CGT charge to UK resident non-natural persons

Currently both UK resident and non-resident companies pay corporation tax rather than capital gains tax in relation to their capital gains.

The initial consultation – published at the end of May 2012- proposed that the CGT regime was to be extended to include non-UK resident non-natural persons only.  However, after consultation, the Government has decided that, non-natural persons that are resident in the UK will also be brought into charge.

Thus, both UK and non-UK companies will now sometimes be subject to capital gains tax in relation to their gains.

Operation

The capital gains tax charge for companies will not apply if the normal exemptions for the new anti-avoidance rules are in point.  This means that it may not apply where:

–          The company carries on a property letting business; or

–          The company carries on a property development business; or

–          The company holds the property as trading stock; or

–          The property is worth less than £2m.

The scope of this charge is therefore quite limited.  However, it is nevertheless important to note that it may apply to all UK companies regardless of whether they have a tax avoidance motive.

There are, of course, already ‘benefit in kind’ disadvantages to holding certain residential property through a UK company.  These new changes will be a further disincentive to doing this.  Where the new capital gains tax charge does apply, the computations to calculate the tax due are also extremely complicated.

For further information please contact the TaxDesk on 0845 4900 509 and ask for Priya Dutta or Paul Bramall.