Further changes to the taxation of UK residential property ahead

Tuesday 15 November 2016

By Glenn Cassidy, Senior Tax Consultant, Equiom Solutions Limited

While the UK tax landscape continues to evolve to meet with the ongoing challenges presented by ever increasing globalisation, the changes which have been introduced over the last four years to the taxation of UK residential property, particularly for international and/or non-UK domiciled owners, could not be more stark.

These changes began back in 2012, with the maximum rate of Stamp Duty Land Tax (SDLT) on UK residential property purchases being increased from 4% to 15% for corporate owners (i.e. a 375% increase). This increase in SDLT has since been extended to individuals who already own a residential property and can now also find themselves paying up to 15% SDLT (incrementally) on the purchase of a UK residential property.

In 2013, the UK Government’s Annual Tax on Enveloped Dwellings (ATED) came into effect, and with it came annual tax charges for corporate structures holding ‘expensive’ UK residential properties and an ATED-related Capital Gains Tax (CGT) charge on any gains realised by such corporates on the disposal of the ‘expensive’ UK residential properties held. This development was seen as a landmark shift in UK taxation with the introduction of a UK CGT charge for non-UK residents, when prior to this, UK CGT only applied to UK residents (with the minor exception of UK assets being used in a trade).

In 2015, the UK Government then extended the UK CGT charge applied to gains realised on the disposal of UK residential properties to all non-UK residents, including individuals, trustees and corporates. With this extension also came the requirement for all non-UK residents to report such disposals to HM Revenue & Customs (HMRC) within 30 days of completion or late filing penalties would be applied.

Following all of the above and the UK Summer Budget 2015, the long-awaited further consultation document detailing the proposed reforms to the taxation of non-UK domiciles was finally issued by HM Treasury on 19 August 2016. Part of this document focuses on the additional proposed changes to the taxation of UK residential property. Offshore companies or other similar vehicles which currently provide UK Inheritance Tax (IHT) protection for non-UK domiciled individuals and trusts with non-UK domiciled settlors will be ‘look-through’ for IHT purposes from 6 April 2017 onwards.

Some professionals had hoped that the reforms which had been proposed in the Summer Budget 2015 may be delayed as a consequence of the EU Referendum result. The consultation document which has been released, however, makes it clear that will not be the case.

The document details:

  • What will be considered to be residential property for the purposes of this IHT charge going forward
  • How the UK government proposes to bring UK residential properties held by offshore companies within the charge of IHT
  • How such properties will be valued at the time of a ‘relevant chargeable event’ and what allowances may be given for relevant debts that exist at the time
  • How the UK government intends to enforce this new charge

Perhaps most importantly, the document goes on to suggest that the UK government does not intend to provide any form of relief for those individuals or trustees who would like to ‘de-envelope’ from the current structure in which their UK residential property is held. This will come as a blow to many who had been expecting some form of ‘de-enveloping’ relief to be offered (i.e. the ability to extract their property from its corporate ‘envelope’ without incurring additional tax charges.)

Given what is contained within this consultation document, it is time for both individuals and trustees holding UK residential property via offshore companies to start considering the cost of retaining their current structure versus the benefit of ‘de-enveloping’. This will particularly be the case where companies are incurring the ATED charge without, perhaps, any benefit being derived from 6 April 2017.

In light of the fact that it has been suggested that no ‘de-enveloping’ reliefs will be available, individuals will need to be acutely aware of the potential tax charges which may arise upon ‘de-enveloping’ (i.e. SDLT, ATED-related CGT and non-resident CGT.) It may therefore be advisable to have a tax professional review any such structures which are currently in existence and provide a cost-benefit analysis of retaining the structure versus de-enveloping. In many cases, particularly when the property is rented out, an offshore company may still provide substantial advantages.

While this is still a consultation document and there may be changes before legislation is finally issued in a few months’ time, it does give us a very good indication of what the UK government’s intentions are for the future.

Given the number of changes which have taken place in this area over the last four years, this has become an extremely complex subject, and one where ‘one size’ no longer fits all. Obtaining professional tax advice should help to ensure that an individual, or trust/company structure does not inadvertently become adversely affected by the changes which have or are about to take place. 

If you are a non-UK resident and/or non-UK domiciled individual who believes that you may be affected by the UK tax changes detailed above, professional advice should be sought to help guide you through the many pitfalls which now exist in this area.


Contact

For more information about this topic, please contact Glenn Cassidy.