Submitted by Sestini & Co
| on Thu, 12/04/2014 - 11:45 | In Uncategorized
Capital gains taxes
Not strictly part of this Autumn Statement, in fact this started just over a year ago as an announcement in Autumn Statement 2013 of an intention to extend the capital gains tax charge on property to non-residents. A big change with a wide-reaching impact, but not in essence a controversial one in a wider context given that most countries who have a capital gains tax (or similar) do extend it to non-residents.
A consultation was launched in March 2014 on the proposals and the government responses were published last week: http://bit.ly/1vXRjbv: nothing further in yesterday’s speech appeared to add to or amend this although naturally we await the detailed draft legislation.
A summary of the proposals is as follows:
- the charge will apply to residential property, it will not apply to trading stock nor to communal use dwellings such as school boarding houses, purpose-built student accommodation and nursing and care homes;
- it will apply to individuals, trusts, personal representatives and some companies – institutional investors will not be subject to the charge;
- the capital gains tax annual exemption will remain available to non-resident individuals;
- the extended charge will NOT apply to the amount of gain relating to periods prior to April 2015; this relief will be given either by rebasing to the 5 April 2015 value or by time apportionment;
- principal residence relief (PRR) will potentially remain available – and it will still be possible to make a PRR election, however for non-residents this will be restricted to properties where the owner has spent 90 midnights at the dwelling in question in the tax year(s) for which the election applies – in practice, therefore, there will be a limit to the length of time an individual can claim PRR on a property whilst remaining non-UK resident;
- there is no suggestion currently that the “deemed occupation” periods available for absences for work will change;
- the disposal must be reported to HMRC within 30 days of completion and a tax payment made at this point unless the vendor has an existing relationship with HMRC in which case the tax can be paid via Self Assessment in the usual way;
- non-resident companies will have access to limited indexation on the gains and the usual 20% tax rate will apply;
- however, where ATED and the non-resident CGT charge both apply, ATED will take precedence.
In summary, non-residents owning UK properties will potentially start paying tax on capital gains on UK property accruing after 5 April 2015: there is certain action to be taken now, such as organising a valuation and/or reviewing the time being spent in the UK against the 90-day rule. Specific advice in the UK and your home country should be taken before making any decisions or taking any action.
ATED (Annual tax on enveloped dwellings)
This is an interesting one: badged as an SDLT anti-avoidance measure but actually functioning very much as a mansion tax – a banded, annual charge payable based on the value of the property. The government and press have said little about the wider and more significiant implications in that it effectively cut down on a widely used means of effective succession planning.
Many families look to preserve their assets for future generations and one way of doing this is through a company/trust structure which provides limitation of liability and long-term governance over the assets. Such structures were already quite costly, requiring two or more sets of annual accounts and tax returns as well as for the trust additional reporting for the 10-year charge and any exit charges and were entered into for reasons quite apart from the potential one-off SDLT saving.
Adding to the existing costs an annual ATED charge and increased rates of CGT and SDLT over and above what they would pay on a personally-owned property makes this kind of prudence uneconomical for many families and quite a number of these structures have been unwound (again at a cost). We assume with these changes and those announced last year, this will only continue.
In summary, ATED applies to residential properties owned through through corporate envelopes, such as companies. Any property “caught” within the ATED legislation attracts three separate and distinct tax charges:
A higher rate of SDLT (15%)
An annual charge which from 1 April 2015 is as follows:
- properties worth more than £2 million but less than £5 million: £23,350;
- properties worth more than £5 million but less than £10 million: £54,450;
- properties worth more than £10 million but less than £20 million the charge will be £109,050;
- and for properties worth more than £20 million the charge will be £218,200.
An ATED Capital Gains Tax charge at 28% – this has in some respects been superceded by the new CGT charge on non-residents explained above, but is higher than the usual corporate tax rate of 20% which non-ATED companies (i.e. those owning properties each valued at less than £500,000* would suffer.
The above rates are an increase of 50% above inflation on the previous year’s figures, whilst when this was enacted it was stated they would rise in line with the CPI. *In addition, what has been absent so far from the Autumn statement coverage is the fact that ATED will soon apply to properties worth £500,000 or more which are owned by companies: the commentary is still focusing on the £2m plus bracket and on non-resident companies rather than UK Ltd companies.
A £1 million to £2 million ATED band is being introduced from 1 April 2015 with an annual charge of £7,000. From 1 April 2016 a further new ATED band will come into effect for properties within corporate envelopes with a value greater than £500,000 but not more than £1 million with an annual charge of £3,500 (subject to inflation-related increases).
Whilst there are exemptions from payment of these taxes for property which is let out to unrelated tenants on a commercial basis, there are tax return filing requirements and the associated risk of penalties for non-compliance, for any non-personally-owned properties whose value falls within these bands. A return is required each year for each property and each return requires careful tracking of how the property has been used from day to day throughout the year. In addition, periods of non-occupancy can in some circumstances lead to a tax charge arising for part of the year and once the annual charge is in play this can have implications for the CGT and SDLT position.
Overall, a complex regime which has changed several times already since its inception and is having wide-reaching effects far beyond the stated aims.
Please do not hesitate to contact us at firstname.lastname@example.org or speak to your usual Sestini & Co contact if you have any questions about these or other UK tax matters.
, Autumn Statement 2014
, Tax mitigation
, Tax update