Mansion tax ‘lite’ set to bring CGT, annual charges and higher stamp duty

Tuesday, May 01, 2012 | Posted by: Mike Hyland
Categories: Personal, Protecting your wealth | Tags: tax planning, capital gains tax, inheritance tax, CGT, IHT, tax avoidance, George Osborne, Mike Hyland, non-dom, minimise, non-domicile, stamp duty land tax, Budget 2012, avoidance, non-doms, SDLT, residential property, non-natural person, property development, property investment

Buyers and owners of high-value residential property are the latest group to be chased for potential tax avoidance. Chancellor George Osborne believes they are avoiding taxes too readily and announced a raft of changes aimed at extracting tax in the recent Budget. Find out if you’re affected, and by how much, below

In his March 2012 Budget, the Chancellor announced the following changes and consultations:

• A seven per cent rate of stamp duty land tax (SDLT) on purchases of residential property for more than £2 million, with this rate being hiked to 15% SDLT where the purchaser of such a property is a ‘non-natural person’ (ie, a company, a partnership in which one or more of the members is a company, or a collective investment scheme). The new rates apply to purchases where contracts are exchanged on or after the 22 March and the 21 March 2012 respectively.

• The SDLT sub-sales relief legislation has been amended to prevent avoidance schemes, which the Government believes are abusing this relief.

• Annual charges – the Government will be consulting on an annual charge on residential properties valued above £2 million owned by non-natural persons, and on the charging of capital gains tax (CGT) on disposals of UK residential property by non-resident non-natural persons, which it is intended will be introduced from April 2013.

Are you affected?
Anyone thinking of buying high-value residential property may be affected by the seven per cent rate. But the real sting in the tail comes with the 15% rate, annual charges, and potential exposure to CGT for corporate and other non-natural purchasers or owners of such properties.

This will be a significant blow for many non-UK domiciled individuals, whose traditional structure is to hold UK property through a foreign company – an approach often primarily driven by inheritance tax (IHT) savings, for which it is still effective, rather than by avoiding SDLT.

The changes will also impact certain businesses, for example, as currently drafted residential property developers are excluded from the 15% rate and the annual charge, but residential property investors are not. While £2 million is a high watermark in most areas of the country, a number of London-based residential property investment companies are highly likely to be disadvantaged by the changes as drafted.

In addition, there are a number of reasons why an individual may wish to acquire a property through a company, perhaps for foreign legal or commercial purposes rather than for any tax avoidance motive, and these buyers will also be hit by the new rules.

What to do about your existing structure
Careful thought needs to be given to new acquisitions of high-value UK residential property, but what if you already have an existing structure holding such property?

Well, you may feel slightly unfairly dealt with as a significant tax exposure may arise from April 2013 on a structure that was uncontroversial at the time you put it in place.

Depending on a number of factors – including the level of the annual charges and the gains likely to be realised on the eventual sale of the property – you may be wise to look at unwinding such structures. We would strongly recommend that you take appropriate advice first, as unwinding could lead to significant tax charges in some cases.

The jury is still out as to whether these changes and proposals will result in ‘the rich paying their share’ or whether they treat certain individuals and businesses unfairly. I will be interested to see the responses to the consultations this summer and will provide an update on any material changes to the proposals.

If you would like to have a chat about this before then, please do get in touch with me at .(JavaScript must be enabled to view this email address). Or for further contacts and information, visit our Private Client & Wealth Management page.

Image: (CC) William Murphy

You might also find these posts useful:

* Budget 2012 impact on high earners and entrepreneurs
* ‘Affluent’ tax unit to hunt for hidden holiday homes
* Avoiding inheritance tax with business property relief? Beware these nightmare scenarios…