Buyer Beware! Government Crackdown on High Value Property and Property Tax Avoidance

In his 2012 Budget Speech on 21 March, the Chancellor set out a number of measures designed to combat perceived abuse of the tax rules in relation to properties. Just in case you lost them amongst the headlines about “granny tax” and “pasty tax”, they cover:

• Buying high-value residential property;

• Particularly buying using overseas companies or similar;

• Proposed annual charge on high-value residential properties owned by overseas companies or similar;

• Proposed capital gains tax charge when selling residential property from an overseas company, etc; and

• Specified tax schemes to avoid stamp duty land tax.

It is quite clear that the Chancellor has foreign corporate (or similar) ownership of residential property in his sights. Unfortunately, his approach may penalise some quite innocent arrangements undertaken by foreign investors.

Stamp Duty Land Tax on Buying Residential Property Worth More than £2million – Increase to 7%

Stamp duty land tax (SDLT) is payable by the buyer on the purchase or transfer of land or property in the UK.

Previously, the highest rate payable was ‘only’ 5%; that rate has now increased when buying residential property whose value exceeds £2million.

...Revised Stamp Duty Land Tax Rates

Rate                Residential                  Non-Residential
 0%                 £0 - £125,000                 £0 - £150,000
 1%            £125,001 - £250,000       £150,000 - £250,000
 3%            £250,001 - £500,000       £250,001 - £500,000
 4%                 £500,001 - £1M                 £500,001+
 5%               £1,000,001 - £2M                 N/A – still 4%
 7%                  £2,000,001+                     N/A – still 4%
15%                £2,000,001+                      N/A – still 4%

                       (“companies”)

To stop ‘forestalling’ – i.e. to prevent a stampede of buying £2million-plus residential properties – this measure was introduced with almost immediate effect, rather than from 6 April 2012 or from Royal Assent to the Finance Act 2012. SDLT generally applies on completion of the contract and the new 7% rate applied with effect from 22 March 2012.(Although there are transitional measures such that the 5% rate would still apply in respect of contracts entered into before 22 March but completed afterwards).

Whilst £2 million is a very high threshold, it will nevertheless apply to a significant number of properties in London – and I know at least one solicitor very much further north who was almost literally ‘burning the midnight oil’ on 21 March! It is also worth bearing in mind that property transactions often take place as part of a chain and deals for lower-value properties may be affected because of implications for properties further along.

One of the more annoying features of SDLT is that the higher rate applies to the full value of the relevant consideration. It is not like income tax, where higher rates apply only to the uppermost levels of income. The result is that a house that sells for £249,950 costs £2,499 in SDLT; a house that sells for £255,000 will cost the purchaser £7,650.

Unsurprisingly, very few properties actually sell at just above an SDLT threshold!

Even Higher Stamp Duty Land Tax (15%) Using Companies, etc., to Buy Residential Property Worth More than £2million

The Chancellor introduced even tougher measures where certain ‘non-natural persons’ buy property: an SDLT rate of 15% was introduced on residential property whose chargeable consideration exceeds £2 million. This time he wasn’t taking any chances and the hike applied from 21 March, without any transitional measures for ‘part-completed’ contracts.

This means that, where the new rules are triggered, the SDLT on a property costing just over £2million will increase from c£100,000 to c£300,000.

...Why?

SDLT is paid (by the purchaser) when a property is bought; people have long sought to get around this cost, and one relatively simple route is (or perhaps was) to buy the shares in the company which owns the property, rather than the property itself. In other words, a person wouldn’t own the property directly, but own the company that in turn owned the property. Stamp duty on shares is a far lower rate of 0.5%, so the tax cost of transferring the shares rather than the property itself can be much reduced.

This was a well-known ‘wheeze’ which has been around for many years; it was widely reported in the press that it had been used by a number of rock stars to avoid tax on substantial property purchases. In fact, the publicity around such activities in the run-up to the Budget was no real surprise: the government had been making it quite clear for some time before the Speech itself that they intended to target such arrangements – as Mr. Osborne said in his speech, “I have given plenty of public warnings that this abuse should stop”.

...’Non-Natural Persons’

The draft legislation attacks certain types of ‘non-natural persons’ buying property:

• A company;

• A partnership one of whose members is a company;

• As part of a collective investments scheme; or

• Any joint investment where one of the joint purchasers falls in the above categories.

(Note that trusts are not caught by the proposed 15% charge, although the draft legislation allows HMRC the right to target other categories of non-natural person at a later date if it is deemed appropriate).

Of course, this could adversely affect property developers undertaking normal commercial transactions, so there are exemptions in the Finance Bill for relevant property acquired by companies or partnerships in the course of a property development business for the purpose of developing and reselling the land – and provided that business has been carried on for at least two years prior to the effective date of the purchase. (Generally completion).

Proposed Annual Charge on Companies, etc., Owning Residential Properties Worth More than £2million

Whilst announced in the Budget Speech this charge is not due to come in until Finance Bill 2013, and will be subject to further consultation. Helpfully, the explanatory notes to the draft Finance Bill 2012 confirm that it is the same types of non-natural persons as above that will get caught for this annual charge.

Proposed Capital Gains Tax Charge on NON-RESIDENT Companies, etc., Disposing of Residential Property

Did you spot that this potentially affects all residential properties, of any value? Whilst the other rules relate to high-value properties, there is no such restriction on these proposals as yet, although the guidance issued with the Budget speech suggested that it would be restricted just to UK properties. The consultation is due out in May, alongside the annual charge proposals above.

...Unintended Consequences?

Whilst many readers will understandably have little sympathy for those who have deliberately side-stepped a significant SDLT tax charge, there are some people who will have used offshore companies or similar to buy UK property for relatively innocent reasons.

Where non-residents (specifically those not domiciled in UK jurisdictions) acquire UK property, they are often advised to buy through an overseas company so that the property isn’t subject to inheritance tax. From the perspective of an individual coming to work in the UK for a few years, it would make sense to want to avoid UK inheritance tax if the worst happened.

...What about EC Law?

The government will have to tread carefully where it applies special rules to non-UK ‘non-natural persons’. It could be argued that applying a charge to non-UK companies, etc., really only puts them on a level footing with ordinary UK companies. But there is a potential asymmetry here: many UK residents will have used companies to buy foreign properties – for instance where that country’s laws otherwise required ownership by a national. Whether or not that company was originally constituted in the overseas territory, UK tax law will generally treat that company as UK-resident (and therefore ‘overseas resident’ in relation to the foreign country) if it is managed and controlled by UK individuals.

SDLT and ‘Sub-Sales’ Avoidance Stopped

Schemes which exploited the SDLT ‘sub-sales’ rules have been around for some years.

The idea was that a person could acquire an interest in a property but simultaneously transfer rights to another party, say an unconnected party, to acquire the property. SDLT was effectively deferred to the point where the third party exercised its option.

These schemes have now been blocked with effect from 21 March by changing the law so that the grant or assignment of an option cannot be a transfer of rights that defers the charge to SDLT.

So What Now – How (Still!) to Reduce SDLT?

It seems that the Chancellor has done much to dissuade people from trying to avoid SDLT and also to encourage people owning properties through companies to reconsider their arrangements.

For those who are unhappy about an increased SDLT charge, there are a few opportunities of varying scope that could be considered.

• Where the value of the property is just above an SDLT threshold, it may be possible to take steps to reduce its chargeable value.

• SDLT is not chargeable on chattels, i.e. movable property. So the ‘canny’ buyer will want to identify (and apportion part of the purchase price) to any such items transferred with the property, within reason.

• Property developers can retrieve a collapsed home buying chain by stepping in to buy a party’s home without SDLT charge where, amongst other conditions, the party will move to the new home as their only or main residence.

• There is also an exemption for employers or property developers who buy an individual’s only or main residence where the individual is obliged to relocate for work purposes.

• Finally, don’t forget that there is still “Disadvantaged Areas Relief” available for purchases of residential property up to £150,000 in certain defined disadvantaged areas – to check if a property is eligible enter the postcode into HMRC’s search tool at http://www.hmrc.gov.uk/so/dar/dar-search.htm, but do remember that not all postcodes – particularly in new developments, will be included – and the relief is only available for another 11 months: it will be withdrawn from 6 April 2013!

Practical Tip :

As this area of tax is in flux, in part, it is advisable to seek advice from a tax specialist.

This is a sample article from the monthly Property Tax Insider magazine. Go here to get your first free issue of Property Tax Insider.