Anthony Hennessy of Brecher deftly guides us through the SDLT maze, summarising the factors that owners of high value property should now be considering…
In tough times governments look for soft targets when it comes to raising taxes. And there are none softer than high value (for the purposes of this article meaning a value over 22 million) residential properties, referred to as “dwellings” in the relevant legislation.
They combine ease of identification (it is difficult to make a desirable piece of Mayfair real estate into part of the black economy) with a nod in the direction of the increasingly fashionable retro 70’s tendency to “squeeze the rich until the pips squeak”.
The radically changed way in which high value dwellings owned by “non-natural persons ” are now taxed has provoked a reappraisal of the structures typically adopted for the acquisition and holding of such properties, particularly where the ultimate beneficiaries behind the structures are non-UK tax resident and/or non-UK domiciled persons.
Such traditional structures generally involved holding such property in a non-UK tax resident company with the various tax advantages this could bring, from the ability to sell on the shares in a property owning company without a charge to stamp duty land tax (“SDLT”) to removing the property from the charge to UK inheritance tax (“IHT”).
Many will be familiar the three pronged fiscal attack on these structures.
The elements are:
- The introduction of a top rate of SDLT of 15% on the acquisition of high value dwellings by “non-natural persons” from Budget day 2012 (as opposed to a rate of 7% for the acquisition of dwellings by others);
- The new annual tax on enveloped dwellings (“ATED”), effective from 1 April 2013, where such high value dwellings are owned by non-natural persons. The ATED will apply in bands up a value per dwelling of £20m where for dwellings valued in excess of that amount there will be a flat annual charge of £140,000; and
- the introduction of a capital gains tax (“CGT”) charge on gains accruing from 1 April 2013 on the disposals of such high value properties by non-natural persons irrespective of whether the non-natural person is UK or non-UK tax resident.
For all three elements, the definition of a “non-natural person” is a company, a partnership (including a limited liability partnership) where at least one of the members is a company; and a collective investment scheme.
In each case there are a number of exceptions to these liabilities where dwellings are used for purposes such as property rental, property development, property trading or farming. These apply to the ATED and the extended CGT liabilities from commencement. They will only apply to the higher rate of SDLT from Royal Assent to the Finance Bill most probably in the third or fourth week in July. The SDLT charge is currently subject to more limited property development limitation.
The effect of the exceptions is to remove many cases of genuine commercial exploitation of such high value dwellings from these liabilities; a recognition that imposing these taxes in such cases would discourage foreign investment in the UK. The main target of these new taxes is the dwelling occupied or available for the use of the ultimate beneficial owner of the property owning structure and his or her family.
In terms of effecting the acquisition of such properties to avoid the 7% charge, nominee arrangements (for confidentiality) or non-UK settlements as buyers are some of the ways being used.
While these may throw up possible IHT liabilities, there may, indeed, be ways of managing such charges. Consideration may also be given to other forms of property ownership but these may throw up “interesting” issues, for example, concerning the situs of assets for IHT purposes. That said, the 7% charge may be high enough, but the 15% rate is prohibitive and, in many cases, moving a transaction away from this charge would justify the additional costs and considerations involved in not adopting a “straightforward” corporate acquisition.
As an aside, the pre-packaged SDLT avoidance schemes which enjoyed something of a vogue are probably so hedged about with uncertainty (witness the retrospective legislative attack on one such scheme in the current Finance Bill) and so likely to enjoy detailed scrutiny from HM Revenue and Customs, as to be unattractive to almost all.
It can also be worth considering whether what is being acquired satisfies the definition of a “dwelling”, although HM Revenue and Customs, in their published interpretation of this, have taken a very wide view of this term, which some may think strays beyond what some may think the relevant legislation actually provides.
The question facing ultimate beneficial owners of pre-existing structures involving non-natural persons which own high value dwellings is, in the words of the song, “Should I Stay or Should I Go?” The decision as to whether to retain the status quo of non-natural person ownership property ownership or to restructure is not straightforward.
The key factors involved in deciding what to do include:
- The cost of the annual charge and the value of the property in question as at April 2012;
- The motives for the structure initially taking into account factors such as confidentiality of ownership;
- The costs involved in effecting any restructuring;
- The tax consequences of effecting any restructuring including potential chargeable gains issues and SDLT costs;
- The need to consider the extent to which the forthcoming general anti-abuse regulation could be applicable to a new structure.
- Managing possible IHT liabilities, as with acquisitions (above); and
- The costs and convenience of maintaining the new structure in the future.
There is no hard and fast rule as to what course of action is appropriate and, generally, there will be a large element of “doing the math” to work out the best way of owning high value dwellings in these most interesting of times.