UK Government Targets Foreign Owners of UK Residential Property

March 30, 2012

On March 21, 2012, the UK Government expressed its intention to ensure that individuals and companies pay a "fair share" of tax on residential property transactions and to tackle avoidance by (a) increasing Stamp Duty Land Tax, (b) proposing an annual fee for the right to own residential property through certain entities, and (c) extending capital gains taxes to the sale of residential property owned by certain entities.  Once the shape of proposed legislation becomes more clear, affected clients will be strongly recommended to consider restructuring the ownership of their UK residential property.

The following package of measures was announced by the Government in their 2012 Budget:  

1.   Stamp Duty Land Tax (SDLT) — new 7% rate on homes over £2 million from March 22, 2012 

Until March 22, 2012, the maximum duty payable on purchase of residential property was 5%.

The Government has introduced a new SDLT rate of 7% for residential properties over £2 million. This measure will affect any purchaser acquiring UK residential property where the purchase price exceeds £2 million–unless, of course, the new rule described below applies to increase SDLT to 15%.

The measure will apply to freehold purchases and leasehold assignments where the consideration exceeds £2 million and to the grant of a lease where the premium exceeds £2 million.

This new rate of SDLT will apply to transactions with an effective date (generally, the date of completion) on or after March 22, 2012. Transitional provisions will ensure that, broadly speaking, the old rate will continue to apply in respect of contracts entered into before March 22, 2012 but completed on or after that date.

2.   Measures directed against high value residential properties owned through special purpose vehicles ("enveloping")

New legislation will be introduced to tackle "enveloping" of high value residential properties into corporate entities. The proposed measures will affect certain types of non-natural persons acquiring or owning residential property in the UK costing more than £2 million. 

        2.1   New 15% SDLT rate from March 21, 2012

A 15% rate of SDLT will be charged on acquisitions of UK residential property where the consideration given exceeds £2 million and the person or persons acquiring the property are certain types of non-natural persons.

"Non-natural person" includes companies (wherever incorporated), collective investment schemes (including unit trusts), and partnerships in which a non-natural person is a partner.  There are exclusions from the charge for property developers and corporate trustees in certain circumstances.  There are also exclusions for certain "institutional" residential properties (such as nursing homes and military barracks).

The 15% rate will apply where the effective date of the transaction is March 21, 2012 or later. There will be transitional rules that will apply to transactions that would otherwise be within the higher rate charge but where the contract was entered into on or before March 21, 2012, but completed after that date.

        2.2   Annual charge from April 2013

The Government will consult on the introduction of an annual charge on residential properties valued at over £2 million owned by certain non-natural persons. The measures implementing the annual charge, effective from April 2013, will be in Finance Bill 2013.

The government has proposed that the annual charges would be set at the levels shown in the table below.

3.   Capital gains tax charge for non-residents from April 2013

The Government will extend the capital gains tax regime to gains on the disposal of UK residential property and shares or interests in such property by non-UK resident, non-natural persons.

The term "non-natural persons" is not defined for this measure, but the official notes on the new SDLT rate for enveloping of high value residential properties (2.1 above) indicate that, for the purposes of that measure, the term will include companies, collective investment schemes (including unit trusts), and partnerships in which a non-natural person is a partner. It is not known at this stage whether there will be any exclusions from the charge, and in particular whether the provisions would only apply to high value (in excess of £2 million) residential properties, or whether the charge would extend to any residential property (including properties with a value less than £2 million) owned by a non-UK resident non-natural person.

This measure will take effect from April 2013, following consultation on the details of the measure.

4.   Comments

The 7% and 15% SDLT rates on transfer of high value residential properties are already effective (unless transitional provisions apply).

However, transfers of shares or interests in special purpose vehicles are not subject to the new charge.  Transfers of shares in UK companies that own UK properties remain subject to 0.5% stamp duty.  Transfers of shares in non-UK incorporated companies will remain potentially outside the scope of UK stamp taxes.

In order to encourage the disincorporation SPVs that own UK property, SPVs will be subject to an annual tax charge, and non-UK resident SPVs will be brought within the scope of UK capital gains tax.

Clients who own UK residential property through SPVs should consider reorganizing the ownership arrangements so that they fall outside the annual charge and CGT provisions.  Until HM Treasury issues their consultation paper, we will not know the kinds of entities that will be within, or outside the scope of the charge.  But if the same principles are adopted for the CGT and annual charge as have been proposed for the stamp tax charge, it may be possible to use some trust based arrangements.

The annual charge and the capital gains tax charge are intended to come into force in April 2013, allowing a period of one year before these new arrangements come into effect. Since so much of the legislation is not yet known, we recommend that clients wait until the shape of the proposed legislation becomes clearer before any existing property ownership arrangements are restructured.  Any restructuring can then be undertaken in a manner that addresses the precise requirements of the new law.