Many non-UK residents (Jersey individuals, trustees, companies) hold UK residential property for personal use or investment purposes.
Until 2013 non-UK residents could mitigate Capital Gains Tax (CGT) and Inheritance Tax (IHT) on UK residential property simply by holding it through an offshore company.
The Finance Act 2013, HMRC introduced the Annual Tax on Enveloped Dwellings (the ATED) for non-UK residents holding UK residential property through a non-natural person (NNP) (defined as a company, a partnership which has a corporate partner or member, or a collective investment scheme).
The ATED came into effect on 1 April 2013 for properties valued at £2 million or above and the main points are described below.
Since the introduction of ATED, HMRC has announced in the latest UK budget an extension of the ATED to UK residential properties valued at £500k or more.
Further, on the 28 March 2014 a consultation paper-Implementing a capital gains tax on non-residents-was issued by HMRC which, if adopted, would introduce a general CGT charge on the disposal of UK residential property held by non-UK residents.
UK Residential property worth £2 Million or more held through a company: First Attack in the Finance Act 2013
Residential property worth £2m or more suffer 3 basic tax penalties.
First, stamp duty land tax was increased to 15% from 21 March 2012 on UK residential properties acquired by a NNP (this compares to 7% if acquired by a non-NNP).
Secondly, the ATED has imposed an annual charge on such properties ranging from £15,000 to £140,000 per annum.
Thirdly, CGT is charged at 28% on the disposal of properties which have borne the ATED. The chargeable gains are known as ATED-related gains. The charge will only be on that part of the gain which has accrued on or after 6 April 2013.
There are exemptions to the above but each structure needs to be considered on its own merits as they will have their own unique issues.
UK residential property worth £500k to £2 Million held through a company: Second Attack in the UK Budget of 19th March 2014
The UK budget of 19th March 2014 extends the ATED and the ATED-related gains regime.
For those properties with a value of more than £1million but not more than £2 million an annual ATED charge of £7,000 will apply from 1 April 2015. CGT at a rate of 28% will apply to a disposal on or after 6 April 2015, but will only apply to that part of the gain which accrues on or after 6 April 2015.
For those properties with a value of more than £500k but not more than £1 million an annual ATED charge of £3,500 will apply from 1 April 2016. CGT at a rate of 28% will apply to a disposal on or after 6 April 2016, but will only apply to that part of the gain which accrues after 6 April 2016.
Stamp Duty Land Tax has been increased to 15% on any residential purchases by NNPs over £500,000 with effect from 20 March 2014.
The Implementation of Capital Gains Tax on all other UK residential property: Third Attack from 6 April 2015
For those non-UK residents who hold UK residential property of any value in their own name, through a partnership or a trust, or in the case of a company where the UK residential property is less than £500,000, who think that they have escaped CGT – think again! Even fund investments may not be immune.
On 28 March 2014 HMRC issued a consultation paper which if adopted will effectively apply CGT to almost all other residential UK property (with a few exceptions).
Under the new proposals HMRC defines residential as “property in use or suitable for use as a dwelling i.e. a place that currently is, or has the potential to be, used as a residence”.
Unlike the ATED definition of residential property crucially it includes residential investment property – i.e. properties which generate rents let to unconnected persons.
These new rules are intended to be introduced from April 2015, with gains accrued prior to April 2015 not subject to CGT. CGT rates will either be 18% or 28% depending on your total UK income and gains.
There are a number of provisions which may mitigate CGT. Losses generated on the sale of UK residential property would be allowable against gains and for individuals personal allowances (currently £11,000 per annum) will be available.
The proposals suggest a new method of collecting the tax: a form of withholding tax to operate alongside an option to self-assess. With the withholding tax it is likely that this will complicate the conveyancing process.
So what can be done?
We said at the beginning that historically you could protect against both CGT and IHT.
With the introduction of the new and/or proposed legislation this will no longer necessarily be achievable. A balance will have to be sought to mitigate CGT and IHT as far as possible.
The CGT rules have been detailed above.
IHT, however, can apply to those who are non-UK domiciled (such as Jersey individuals and trustees). Many consider that if the value of their net UK assets falls below the IHT threshold of £325,000 because debt exists then IHT does not apply. The 2013 Finance Act needs to be considered very carefully as that Act makes many debts non-allowable; it is not as easy as you think.
If you own or are considering purchasing UK residential property then tax planning is required to either restructure before the new rules apply or if purchasing to take into consideration these new rules.
Mitigating tax on UK residential property is becoming increasingly complex and full of traps for the unwary – careful planning is needed.