The taxation of high value UK residential property has seen significant changes in recent years. The 2014 Budget announced the extension of anti-avoidance tax charges to lower value properties, which will bring more properties within the scope of these rules.
Furthermore, the Government is currently consulting on introducing a UK Capital Gains Tax (CGT) charge for non-UK residents disposing of UK residential property from April 2015.
Annual Tax on Enveloped Dwellings (ATED)
Since 1 April 2013, the ATED has been charged where a Non Natural Person (NNP) owns a UK residential property valued at more than £2 million. An NNP can be a company – including both UK and non UK companies, a partnership with a corporate partner or a collective investment scheme. The 2014 Budget announced ATED will cover properties valued above £1 million from 1 April 2015 (£7,000 per annum) and above £500,000 from 1 April 2016 (£3,500 per annum).
The existing reliefs for certain property businesses will still apply. A NNP needs to file an ATED return with HM Revenue & Customs (HMRC) for each chargeable period that a qualifying property is held. Even if a relief claim can be made to reduce the ATED to nil by qualifying for one of the few exemptions, the return (which requires a property value assessment) must still be submitted.
The ATED charge increases each year in line with inflation (CPI). The charges for the first and second chargeable periods are:
Value of UK residential property
Tax charge for the period ended 31 March 2014
Tax charge for the period ended 31 March 2015
|£2 million to £5 million
|£5 million to £10 million
|£10 million to £20 million
|Over £20 million
Stamp Duty Land Tax (SDLT)
Since 22 March 2012, SDLT at 15 percent has been charged where a NNP acquires a UK residential property worth over £2 million. The 2014 Budget announced an extension to the 15 percent rate from 20 March 2014 where the purchase price exceeds £500,000. Like ATED, certain businesses can claim an exclusion from the 15 percent SDLT rate in the relevant land transaction return submitted to HMRC.
Capital Gains Tax (CGT)
Since 6 April 2013, NNPs in the ATED disposing of UK residential property worth over £2 million have been liable to CGT at 28 percent on the gain accrued since that date. The 2014 Budget announced that the minimum threshold will reduce to £1 million from 6 April 2015 and to £500,000 from 6 April 2016. Like the ATED, certain businesses can claim an exemption from ATED-related CGT.
HMRC must be notified of ATED-related capital gains by 5 October following the end of the tax year in which the disposal was made. An ATED-related CGT return must be filed with HMRC and the CGT paid by 31 January following the end of that tax year. Penalties will apply for late filing and late payment.
Extension of CGT to non-UK residents
The Government is currently consulting on the extension of CGT to gains arising from April 2015 to non-UK residents disposing of UK residential property. The aim of the proposals is to ensure both UK and non-UK residents are subject to a comparable rate of tax on such gains.
The rate of the extended CGT charge has not yet been announced. Nor has the method of collecting the tax. However, the Government has said that it would prefer to introduce a withholding tax (operated by lawyers, estate agents and accountants) to work alongside the alternative option of self-assessing the tax liability.
The proposed rules will exist alongside the ATED-related CGT rules and there are fundamental differences between these two CGT charges:
- The extended CGT charge will not be restricted to NNPs. It will apply to all residential property regardless of value and affect a wider range of non-UK residents including individuals and potentially non-UK resident trusts and partners
- There will be no minimum value threshold
- Gains on UK residential property used as an investment (including rental businesses) will be taxed subject to exemptions for UK and foreign REITs and some other funds.
The consultation also includes proposals to change Principal Private Residence (PPR) relief if more than one residence is owned. PPR currently exempts individuals from CGT on the disposal of their main residence. The consultation proposes the removal of the ability for taxpayers to elect which residence is their main residence. This would be replaced by the determination of main residence based on the balance of various factors or the introduction of a definitive test. A further proposal could make PPR relief available to non-UK residents in certain circumstances.
What action should you now consider taking?
A NNP (typically a company) needs to self-assess its ATED liability. There is the option of self-assessing the property value or commissioning a formal valuation, to support property value and decide which tax banding the property falls within.
Currently, only high value UK residential property held by NNPs is subject to CGT. The forthcoming change from April 2015 extending the scope of CGT to include non-residents who own property directly could further complicate acquiring and owning residential property in the UK.
Understanding the aims and requirements of the property owner are key to providing the most suitable advice. For example, is the property intended to be used as a long-term family residence or is it more of a shorter term investment?
If you already own UK residential property or you wish make such an acquisition, these rules could affect you. Please call your usual KPMG Private Client contact.