Year of major change for British property taxes

This year is shaping up to be one of property tax revolution in Britain, with three of the key taxes undergoing major changes, some of which will directly affect non-residents.

From April, non-residents, including expatriates, selling British residential property will be subject to the same capital gains tax implications as those living in Britain. Institutional investors will be exempt from the changes.

The rate of tax will be the same for expatriates as for British residents and will be applied at two rates - 18 per cent on chargeable gain for basic-rate taxpayers and 28 per cent for higher-rate taxpayers. Individuals and trustees, whether British residents or expatriates, will have the same annual exemption. The annual exempt amount for the 2014-15 tax year is £11,000.

Both British resident and non-British resident taxpayers will be prevented from designating a British property as their principal private residence, unless they have lived in the property for at least 90 days during the past year. Sellers will only have 30 days after the sale to calculate and pay the tax, although they will then have up to 12 months to amend this. Penalties will apply for late payment and underpayments that are later corrected.

There are also upcoming changes to the annual tax on enveloped dwellings (ATED), applicable to both British and non-British resident corporate owners. From April, ATED will apply to residential properties worth more than £1 million, a reduction in the threshold, which was originally set to £2 million. The threshold for the ATED charge will then be reduced further to £500,000 from April 1 next year.

In addition, the government has announced that it will increase the annual rates of ATED by 50 per cent above the rate of inflation for properties worth more than £2 million.

These changes will affect corporations that hold a wide property portfolio as well as private buy-to-let landlords who own portfolios through a company.

The annual charges are dependent on the value of the property and are calculated based on the consumer price index. In addition, ATED only applies to property that is considered to be a dwelling, and as such, commercial property is exempt. Historic houses and farms can fall under this bracket, provided a significant proportion of the property is used for commercial benefit. Let properties are exempt from the charge, provided they are not let to or used by members of the owner's family or connections.

Those looking to add to their property portfolio must now consider very carefully the tax implications on any future transactions, as it may affect their return on investment and a property's rental yield.

The obvious solution may be to transfer the deeds of a property to an individual rather than company ownership. However, people need to think of the stamp duty land tax (SDLT) implications of this as it could be viewed as a sale, as well as inheritance taxes (IHT) of 40 per cent that would apply.

The most important thing to factor in is the type of property to purchase - for example, if one has got £5 million to spend, buying a multiple dwelling such as a block of flats could be much more tax-efficient than buying two or three individual residences.

The changes to capital gains tax and ATED follow the monumental overhaul of SDLT in December's budget, when, in a welcome move, the chancellor of the exchequer altered the slab system to a graduated system.

It has been 10 years since SDLT replaced stamp duty. Previously, it was simply an administrative charge. Since its introduction, it has become a revenue-generating tax. In the chancellor's own words, it was "one of the worst-designed taxes".

The fact that, up until the end of last year, a mere £1 increase in the price of a house would triple a purchaser's tax bill was an injustice that dramatically affected the property market. The new system will ensure that, in future, people will only pay the higher rate on the additional amount above the threshold.

The changes, while welcome, were also accompanied by a new series of rates for the tax that punitively increases the rate on the most expensive properties. A £1.5 million house suffered an increase of 140 per cent in its tax rate, and anything priced more than £2 million has suffered a 71 per cent rise, which is another nail in the coffin for the ever-mentioned mansion tax.

At the lower end of the market, there were 25 per cent tax cuts for the cheapest properties and an 8 per cent cut for the more expensive homes in the £750,000 price range.

With any luck, this announcement will turn things around and help begin to stabilise Britain's property landscape.

While there is a copious amount of information available on the internet surrounding capital gains tax, ATED, IHT and SDLT, every property transaction is individual and, as a result, will have its own tax implications. As with all tax matters, it is essential to seek expert tax advice from a professional source to work out exactly how it affects you.

David Hannah is principal consultant at Cornerstone Tax