Concrete Analysis

British budget tightens taxation of homes held by non-residents

Higher rate of stamp duty tax will be applied to homes people own by way of corporate entities

PUBLISHED : Tuesday, 08 April, 2014, 3:21pm
UPDATED : Wednesday, 09 April, 2014, 2:32am

In tax terms, Britain's budget, released on March 19, was mostly uneventful. However, there were some unexpected announcements for non-residents who own British property.

In addition, more details were given on the proposed extension of capital gains tax to non-residents in the consultation paper published on March 28. The proposals will adversely affect more owners than originally thought.

Since 2012, the British government has been seeking to tax people who own British residential property by way of a company or other "corporate envelope".

The aim was to "tackle tax avoidance and to ensure that those wrapping residential property in corporate and other 'envelopes' and not using them for commercial purposes, such as renting them out, pay a fair share of tax".

The proposals will adversely affect more owners than originally thought

To discourage the use of companies and other "envelopes", first, a higher rate of stamp duty land tax will be charged on purchases by these entities and, second, an annual tax will be levied - the annual tax on enveloped dwellings (ATED). Originally these charges applied only to properties worth more than £2 million (HK$25.71 million) that were held by non-human entities. Now they will apply to properties worth over £500,000.

The stamp duty land tax rate will be 15 per cent and will be a cost for the buyer on properties acquired on or after March 20.

ATED, which came into effect in April last year, is payable annually. For the period from April 1 this year to March 31 next year, payment is due at the end of this month.

The tax due where the value of the property is more than £2 million but less than £5 million is £15,400, rising to £143,750 where the value of the property is over £20 million.

The budget announced two new ATED bands. From April 1 next year, a new band will come into effect for properties valued at more than £1 million but not more than £2 million, with an annual charge of £7,000; and from April 1, 2016, another new band will come into effect for properties with a value greater than £500,000 but not more than £1 million, with an annual charge of £3,500.

In addition, where ATED applies, on a subsequent sale, capital gains tax will be payable at 28 per cent on any gain after April 6 last year.

This related capital gains tax will apply to the new ATED property bands with effect from April 6 next year and April 6, 2016, respectively.

It should be noted that there are some reliefs available from ATED and the ATED-related capital gains tax, most notably where the property is being commercially let or commercially developed.

The consultation on the extension of capital gains tax to non-residents disposing of British residential property was first announced in December.

It was expected that the capital gains tax extension would apply only to properties worth more than £2 million held by individuals and trustees; however, the proposals are much wider. The consultation period closes on June 20.

The proposal is to apply capital gains tax to gains made on not just personal-use residential properties but also on rental or investment properties. Individuals, partners, companies and trusts will all fall within the scope of the new charge.

The new rules will take effect from April next year and will apply only to gains "arising from that date".

It is not clear whether "arising from that date" means that gains before April next year will be outside the scope of the new charge.

It was certainly anticipated that this would be the case, and this approach would be consistent with the approach adopted in relation to ATED-related gains, but clarification is needed.

Principal private residence relief, which can exempt an individual's main home from capital gains tax, will be available to non-residents in certain circumstances, but the rules will be amended to make it harder for a non-resident individual to have a British principal residence.

These amendments will be in addition to the amendment announced in the budget to reduce the final exemption period (the period for which relief can be given where the property is not occupied by the owner) from 36 months to 18 months with effect from April 6.

The consultation paper only addresses the rate of tax to be paid by individuals, namely 18 per cent or 28 per cent, depending on the level of British income and gains.

We will need to wait for the response to the consultation period for greater clarification. However, the paper suggests a significant shift in the taxation of British residential property held by non-residents.

Only time will tell what impact the changes will have on the London property market now and in the future.

Katie Graves is a partner at international law firm Withers