In the March 2012 Budget the Government caused consternation when it announced a consultation on new tax charges for high value residential properties that had been 'enveloped' into companies and into other 'non-natural persons' (NNPs).
The draft legislation for Finance Bill 2013 was published shortly before Christmas and gives a much clearer idea of precisely who will be affected, and in what ways. This note highlights some key changes from the original proposals and then considers the question 'What should I do next?'.
SEVEN KEY CHANGES TO THE PROPOSALS
1 Helpful new reliefs to be available for all three of the annual tax, the new capital gains tax liability, and the 15% SDLT charge
The Government has listened to the many representations about the effect of the proposals on genuine businesses and has introduced a raft of new reliefs. These will be available for all three charges.
They are designed to assist 'genuine businesses carrying out genuine commercial activity' and, very briefly, they give relief to the following:
- property development businesses where the property is not occupied by a 'connected person';
- property rental businesses, subject to the same requirement about connected persons;
- property trading businesses, subject to the same requirement about connected persons;
- properties open to the public at least 28 days a year and run as a business
- employee accommodation, provided the occupier is not too closely connected with the company;
- most dwellings owned by charities;
- farmhouses occupied by a working farmer, provided certain conditions are met;
- diplomatic and publicly owned properties;
- property that is conditionally exempt from inheritance tax (IHT).
The reliefs are a major improvement, as they at least prevent the new rules from catching, in the side wind, companies and other NNPs that were never the target of these proposals.
It will, however, be most important for anyone who thinks they may be able to benefit from one of these reliefs to check that they fall within the exact scope of the wording of the relief and in particular that the wide 'connected persons' provisions do not apply.
Another possible trap is that these relaxations are framed as reliefs, not exemptions, so the positive step of claiming them from HMRC has to be taken. To take advantage of any of them in the context of the annual charge (now to be called the Annual Residential Property Tax (ARPT)), a 'nil charge' ARPT return has to be made each year.
Whilst the reliefs are also to be available in connection with the 15% SDLT charge, as currently drafted they will only be available for completions taking place after the Finance Bill receives Royal Assent (which could be as late as July 2013).
2 Capital gains tax rebasing
There is welcome news on capital gains tax (CGT) for those who have already held a high value residential property through an NNP for a considerable period, so that the property already stands at a significant gain.
The new CGT charge for the NNP will only apply to gains accruing from April 2013 onwards. In other words, the base value of these properties will get an uplift to that date, reducing the CGT bill for the NNP on an eventual sale.
Clients for whom privacy and/ or IHT protection are important should consider whether this may shift the balance in favour of retaining a corporate structure. Much will depend upon the value of the property and how large the ARPT charge would therefore be. Another factor will be how readily funds can be brought to the UK to pay the ARPT, and whether this may trigger adverse tax implications, whether in the UK or in a 'home' country.
3 Valuations
Individuals who will be relying on the CGT rebasing will generally need a professional valuation as at April 2013 so that, when they sell, they can prove the value of the property as at April 2013. A valuation (which can probably be less formal) will also be needed as at 1 April 2012, to establish which charging band applies to the property.
The level of the annual charge will be set as follows:
- £15,000 per annum for properties valued at between £2m-£5m;
- £35,000 for properties valued at between £5m-£10m;
- £70,000 for properties valued at between £10m‑'20m;
- £140,000 for properties worth more than £20 million.
Where a property is unique, unusual or for some other reason difficult to value, or where it falls close to a division between bands, it may well be worth tacking a 2012 valuation on to the 2013 CGT valuation that is anyway being done. This would provide clear evidence if HMRC were to dispute the banding the taxpayer believes to be correct.
4 CGT rate
The rate for the new CGT charge was not expected to be set until the Budget in March 2013, so it was helpful that this was announced in December as part of the draft Finance Bill package. That said, setting it at the standard CGT rate of 28% destroys hopes that it might be a lower rate. For many of those currently in structures involving NNPs this is more than compensated for by the introduction of rebasing however.
There will be a specific tapering to avoid a 'cliff edge' at £2m, which would otherwise have meant that selling a property just above £2m netted considerably less than selling the same property just below £2m.
5 CGT: UK companies and NNPs beware!
UK companies anyway pay corporation tax on their capital gains so it was unsurprising that, although they came within the ARPT, and were affected by the 15% SDLT charge, the original proposals did not include them in the new CGT charge. However, the Government is now consulting on bringing UK NNPs within the new CGT charge 'for consistency', so it is said, though it may be driven by EU considerations.
Given that the rate for the new CGT charge will be 28%, whereas corporation tax on capital gains is currently at 24% and will fall to 21% by 2014/2015, this possible change is unwelcome. Although many companies should not be affected by any change as they will qualify for one of the reliefs such that any gains will remain within the charge to corporation tax.
6 CGT: trusts and offshore trusts
It is good news that trusts and trustees will not be treated as NNPs, as had been the inference in the Consultation Document. As a result, trusts which directly own relevant UK properties will not be within any of the three heads of charge – 15% SDLT, ARPT or the new CGT charge on NNPs.
The classic trust/company structure will still be caught however, because of the presence of the company. So the question of whether to unwind the company before April remains, involving many of the same complexities as before, but with some points being clearer.
For those who have no exposure to the existing UK anti-avoidance tax regime that charges offshore trust/ company structures to CGT it is a big bonus that only gains post April 2013 will be taxed on the NNP. In some cases it may still be best to unwind before April, but in others it may be considered that exposure for a year, or part of a year, to the ARPT and the new CGT charge (and funding it) is worthwhile to be able to plan with certainty about the new rules.
What has been published so far is only a draft, for consultation, of some parts of the Finance Bill, with the draft provisions for CGT being promised for January and still awaited at the time of writing. Draft provisions are liable to change until Royal Assent is given.
In a great many cases it is not just the charge on the NNP that will need to be taken into account when considering CGT. Rebasing will make the interrelationship between the new CGT charge on NNPs and the existing regime for charging offshore trust/company structures to CGT simpler than it would otherwise have been, but there are still difficult points on the inter-relationship with the existing anti-avoidance rules to be teased out once the draft CGT legislation is published.
7 Partnerships
Much of the planning discussed after these new proposals were announced centred around the creative use of partnerships. The way in which the Government has listened to representations, and in particular the introduction of CGT rebasing, makes some of these routes less necessary. The Government has said that it will 'monitor the use of partnership arrangements in case of any manipulation'. So planning must be approached with suitable care, in this as in other areas.
'WHAT SHOULD I DO NEXT?'
The key recommendation is to start planning ahead now, to identify how the charge will affect your particular structure, and whether appropriate changes can be made to the structure to lessen any adverse impact.
Although some details of the taxes remain to be settled, the original time frame is being maintained and is extremely tight.
While the amount of tax at stake might not be large if the property is taken out of the NNP shortly after the start dates, owning a high value residential property via an NNP on or after the start date (even if only for a few days, say because the deadline is marginally missed) will trigger reporting obligations.
The ARPT will come into force from 1 April 2013: 1 April this year falls on Easter Monday, so the window in which to plan is even smaller than it seems.
The extension of the CGT regime will take effect from 6 April 2013: publication of draft legislation and draft HMRC guidance on the CGT changes was promised for January.
Time needed to liquidate: during the period up to April, offshore professionals are likely to suffer heavy demand for requests to liquidate property-owning companies. If planning will involve a liquidation, it will be essential to allow sufficient time for this process to be fully completed.
Additional factors may need to be built into the liquidation timetable. For example, does the company currently have all the requisite powers to do whatever restructuring is required; will it be necessary to obtain consents from the landlord or other person in order to transfer the property from the company to the new owner?
Timing implications of a borrowing: if there is an outstanding borrowing on the property (or a new borrowing will be needed as part of any planning) sufficient time has to be factored in for the bank or other lender to satisfy itself about the proposals and to decide whether it is prepared to lend.
If the current borrowing has been in place for some time, so that circumstances may have changed, then rather than regarding this as simply rolling over the same loan (where a relatively light checking process might be sufficient), the bank may well regard this as a fresh lending. If so, more time will be need to be allowed to put the necessary loan arrangements in place.
It will also be most important to check the financial terms of any existing loan and whether a loan taken out now would have new, less advantageous, terms. The extra cost of a new borrowing could be sufficient to affect the route taken.
Collapsing the structure is not necessarily the right solution: The Government hopes that these new rules will pressurise individuals to dismantle structures they have put in place, and in some cases this will indeed be the best approach. It is vital, however, to step back and think about the reasons why the structure was created in the first place, and whether those reasons still hold good. Two of the most important reasons are likely to have been:
- privacy; and
- protection from IHT.
It might well be a poor exchange to take steps to avoid an ARPT charge of less than 1% per annum if the result is that it has been replaced by an IHT charge at 40%. In some cases the IHT can be mitigated in other ways, but each case needs to be approached on its own facts.
This note highlights just a few of the key changes from the original proposals.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.