Posted by James Pearson on 14 Dec 2012

Ownership of Residential Property

HMRC have been taking steps to increase the tax payable on residential property, worth over £2m that is owned by non-natural persons. Non-natural persons are companies, partnerships with corporate members and collective investment schemes. Trusts that own property directly are not caught by these rules.

This process began on 21 March 2012 with the introduction of a new 15% rate of stamp duty payable by non-natural persons on the purchase of such properties. This rate was over double that over the rate that would previously have been expected to be paid.

The Chancellor’s Autumn Statement has provided details of two more provisions that form part of this initiative. The first measure is an annual charge will be levied on residential properties worth over £2m. The charge payable will vary dependent on the value band that the property falls within. For example, a property worth between £2m and £5m will attract an annual charge of £15,000, while a property worth over £20m would lead to a £140,000 charge.

The second change is the extension of capital gains tax to non-natural persons that are resident outside the UK (and consequently not usually subject to UK taxation on capital gains) and that hold UK residential property worth over £2m. This new measure will charge tax on capital gains at 28%.

These policies represent a comprehensive policy to reduce the tax benefits of owning UK property through offshore investment vehicles, but crucially HMRC has only targeted the legislation at certain structures while providing exemptions for others.

The new charges only apply to property owned by non-natural persons, the most common of which would be a limited company. Non-UK limited companies have often been used as a way of reducing exposure to UK inheritance ta x (IHT) on the value of the property. Having a property owned by an offshore company and for that company to be owned by a non-UK trust will avoid the IHT liability but at the cost of the increased rate of SDLT/annual charge.

If the property is owned directly by a non-UK trust, the property will be owned by a “natural person” and so will be outside the scope of the charge. Unfortunately, the property will then be potentially exposed to UK IHT.

For certain properties and in certain situations, we are able to ensure the property is owned by a natural person and still not within the UK IHT charge. This is a very specialised and technical area and if you are concerned about the exposure to the new charges and the potential IHT liability, please call us.

The benefits of offshore companies owning property have been compromised but the use of a correctly structured offshore pension scheme, such as a QNUPS, can continue to have inheritance tax and capital gains tax benefits while also avoiding the annual charge and the increased stamp duty land tax rates.

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If you would like any advice regarding the above article or would simply like to discuss other ways in which we could help you or your business, please contact us on 01962 856 990 or customerservice@taxinnovations.com.