To quote HM Treasury, the Government perceives that tax is being avoided “whereby an individual establishes a company to envelope a property owned for the personal use of that individual or their family” (consultative document entitled 'Ensuring the fair taxation of residential property transactions)' published in May 2012).
Three major changes were introduced by Finance Act 2013 which affect property held in or acquired by an ‘envelope’ structure.
These rules focus on “Non-natural persons” which include companies, corporate partnerships and collective investment schemes. The changes are broadly:
- A 15 percent stamp duty land tax (‘SDLT’) charge on the acquisition by “non-natural persons” of UK residential properties costing more than £2m (became effective on Budget Day in March 2012);
- An Annual Tax on Enveloped Dwellings (‘ATED’) on “non-natural persons” who own UK residential property worth more than £2m; and
- A capital gains tax (‘CGT’) charge on the disposal of UK residential properties worth more than £2m by “non-natural persons”.
The ATED and CGT charges came into effect from 6 April 2013.
Some commercial activities (such as rental businesses) are exempt from the changes which mainly apply to properties occupied by a beneficial owner or a person connected to that beneficial owner.
However, the exemption has to be claimed via the submission of the appropriate forms to HMRC – it is not automatic.
Further measures have recently been introduced to ensure that schemes designed to remove properties from the scope of the ATED, or reduce its impact by ensuring a property falls into a different tax band, are disclosable under the Disclosure of Tax Avoidance Scheme Regulations (DTAS). The DTAS rules are a core part of HMRC’s anti avoidance strategy and are primarily designed to give HMRC early warning of transactions that they perceive are being used for tax avoidance.
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 in the nature of a shorter term investment.
If you already own UK residential property worth more than £2m or you are looking to make such an acquisition, you could be affected by these rules. If you are, please call your usual KPMG contact or any of the individuals listed in the attached publications.