Chris Belcher considers the new tax rules for high-value property

I have had cause this week to look at the proposed new tax rules relating to higher-value residential properties, which were announced in the budget on 21 March 2012 (and see https://bit.ly/LzWjYt).

The government is concerned about tax avoidance by wealthy owners of high-value residential property, and the chancellor announced a number of measures to deal with this. Some of those measures were to be the subject of consultation and on 31 May 2012, the consultation document was published (see https://bit.ly/Kfysw0).

Avoidance tactics

It is worth considering briefly why this issue has arisen. The relevant taxes in question are stamp duty land tax (SDLT) and capital gains tax (CGT) which can make the ownership of, or more specifically the acquisition and disposal of, high-value residential property quite costly. Consequently, methods have been developed to avoid or mitigate these tax charges. For present purposes, the government considers a ‘high-value’ property to be a single residence valued in excess of £2m.

The principal tax avoidance method used is to purchase these high-value properties in a company, typically resident offshore, rather than in the name of the individual buyer. This practice is known as ‘enveloping’ the property.

Enveloping works as follows. While it does not avoid SDLT on the original acquisition, it enables the property to be transferred at a later date without any SDLT being payable; this is because it is the shares in the company which are transferred, rather than the property itself. Putting a property in an envelope risks losing the principal private residence relief from CGT, but if the envelope is in fact a non-resident company, CGT can be avoided as well as SDLT.

So, to discourage the initial purchase by a company, in the budget 2012 the government introduced a new higher rate of SDLT for the acquisition of a high-value residential property by a ‘non-natural’ person (i.e. a company or corporate-type vehicle), that rate being 15 per cent.

Gentle encouragement

But what about properties already in companies? Well, to encourage the transfer of such properties out of the envelope, and therefore to bring them back into the SDLT net, the chancellor proposed two further tax changes:

• an annual charge to SDLT for non-natural persons owning high-value residential property; and

• an extension to the CGT regime to include disposals by non-natural, non-resident owners of high-value residential property.

The consultation document deals with both these changes.

First, the annual tax charge. The consultation document sets out the proposed rate of charge which will start at £15,000 per annum for properties valued in the £2m to £5m bracket, and rise to £140,000 per annum for properties valued in excess of £20m.

Some commentators had been concerned about the date on which properties would be valued, and the extent of any rebasing. It is now proposed that the valuation date will be 1 April 2012, with a rebasing every five years. Despite the speed with which the property market can move, this is probably a workable solution.

Practically however, it means that clients with residential properties owned by companies, who know or suspect that their property might be worth £2m or more, should now get those properties valued as at 1 April 2012.

Helpfully, it is proposed that a prior valuation service will be available from the Valuation Office to enable values to be agreed before the charge is implemented, but it will remain to be seen how that will work in practice.

The annual charge of £15,000 for a property valued at £2m represents a tax of 0.75 per cent. The charge will rise annually in line with the CPI measure of inflation, and amounts, effectively, to an equivalent of the SDLT charge of seven per cent every ten years or so.

Hidden targets

The extension of the CGT rules aims to catch those who shelter their gains in offshore companies. This represents the first time CGT will apply in such a way to non-resident entities and the scope of the charge could be very wide, potentially catching trustees, personal representatives and clubs and associations, as well as the intentional target, the typical offshore company.

The detail surrounding the proposed CGT charge is more sparse than the proposal for the annual SDLT charge. The rate of tax is not yet known, nor the way in which the charge will be levied.

The bottom line for our clients seems to be that the costs of acquiring and owning high-value residential property are set to rise considerably. There will be decisions to be taken by those who already own such property as to whether or not to retain their ‘envelope’, and if they decide to do so, there will be additional annual compliance costs and a valuation should be obtained now.

On the other hand, there will be genuine property-owning clients who find themselves caught by the new rules despite having no intention whatsoever of avoiding tax. It is hoped that the representations made in response to the consultation will ensure that such clients are properly protected.

The consultation closes on 23 August 2012, and after that the extent of the future for enveloping and owning high-value residential property will become much clearer.

Chris Belcher is a partner at Mills & Reeve LLP. Contact Chris on chris.belcher@mills-reeve.com; follow Chris on Twitter at @PC_Lawyer