In today’s Budget there have been effectively three changes announced affecting the purchase and holding of residential property by “non-natural persons”. A “Non-natural person” means:
- A company or other body corporate;
- A partnership, including a LLP, of which at least one of the members is a corporate; or
- A collective investment scheme.
The changes affect:
- When 15% rate of stamp duty land tax (‘SDLT’) applies on the acquisition of residential property by a non-natural person;
- The threshold for the application of the annual tax on enveloped dwellings (‘ATED’); and
- As a consequence of the changes to ATED threshold, above, the occasion when non-UK tax resident companies realising gains on the disposal of residential property have those gains subject to UK capital gains tax (‘CGT’)
Previously, the 15% rate of SDLT applied where the chargeable consideration on which SDLT was chargeable exceeded £2m. Now, for transactions where the effective date (completion or substantial performance of the contract for the sale and purchase of the property) is on or after 20 March the 15% rate will apply where the chargeable consideration exceeds £500,000. There are to be transitional provisions which are designed to ensure “in the great majority of cases” if contracts have been exchanged before 20 March but which are completed or substantially performed on or after that date then the old £2m threshold will still apply.
In relation to the ATED, there is to be a staggered reduction of the threshold:
- The new band for ATED applying to residential properties worth more than £1 m and not more than £2 m, with an annual charge of £7,000, will apply from 1 April 2015. In the first year, ATED returns applicable to this band will not be required until 1 October 2015 with payment required by 31 October 2015; and
- An additional band for ATED applying to residential properties worth more than £500,000 and not more than £1 m, with an annual charge of £3,500, will apply from 1 April 2016.
As a consequence all corporate and other ‘envelopes’ affected by the new ATED bands will also be subject to CGT on disposal of the properties held, at a rate of 28 per cent.
The extension to the ATED-related CGT charge will take effect from 6 April 2015 for properties worth more than £1 m and not more than £2 m. The charge will apply only to that part of the gain that is accrued on or after that date. The extension to the ATED-related CGT charge will take effect from 6 April 2016 for properties worth more than £500,000 and not more than £1 m. The charge will apply only to that part of the gain that is accrued on or after that date. The balance of any gain will continue to be treated as at present.
These changes do not affect the nature of the properties falling within the 15% rate and the ATED legislation (and consequent CGT charges). That is, in particular, the exceptions to the application of these charges still apply.
Taxing, in more than one sense of that word, provisions which could be fairly said to apply to “high value”, in almost any postcode, residential property have now been well and truly democratised. Perhaps this was because of the ‘bulge’ in property transactions reportedly taking place particularly in the £1.5m – £2m bracket. No matter the reason those acquiring residential property for £2m or under where it will not have a solely business or investment purpose will need to consider carefully how such property will be acquired and held. In addition, those with existing corporate ownership structures which are likely to be affected by the changes to the ATED (CGT) regime will need to think about whether these are viable for the future and “do the math”.
We have substantial experience of advising on ‘de-enveloping’ and would be pleased to advise.