De-enveloping nom-dom properties is finally on the up

Non-domiciliaries have historically purchased UK residential property using a company structure, usually for privacy reasons or to manage their exposure to UK inheritance tax (IHT).

For several years the government has been trying to discourage this practice, which it refers to as 'enveloping', by making numerous changes to the taxation of UK residential property.

The 2012 Budget introduced a new annual tax on UK residential properties held by non-natural persons, for example companies. The new annual tax on enveloped dwellings (ATED) came into effect from 1 April 2013 for properties with an April 2012 value of £2m or more.

The government hoped that ATED would discourage using companies' structures for avoiding stamp duty land tax (SDLT). SDLT payable on a change of ownership is significantly reduced when a residential property is held by a company because it is the company shares that are sold, not the property. The flaw with the plan was that this was very rarely the reason behind the use of a company.

Holding UK residential property though a company continued to provide privacy and mitigated IHT - the vast majority of our clients were willing to pay the annual charge.

The 2014 Budget widened the application of ATED by extending the tax regime to UK residential property worth more than £500,000. With many London house prices, where most affected properties are located, close to or worth more than £500,000, this brings a large handful of UK residential properties owned by companies within the charge. Yet we saw little change in behaviour.

The 2014 Autumn Statement increased the rates by 50 per cent, rather than merely in line with inflation as was originally intended. The top rate increased from £143,750 a year to £218,200. Still, this was a price worth paying for privacy and IHT mitigation.

Then, in the 2015 Summer Budget, the government changed its approach, announcing that, from April 2017, using a company to hold UK residential property would offer no IHT protection. It had clearly been noted that the true motivation was often IHT mitigation, not SDLT avoidance.

So, after several false starts, there are now signs that the tides are turning. New properties are being purchased without company structures, and properties already owned are being 'de-enveloped'. Data from HM Revenue and Customs shows that only 3,990 properties are held in structures required to pay the annual charge: a reduction of 6 per cent from 2014. Furthermore, data from the Land Registry reveals there has been a five-fold increase in £10m properties registered in personal names from 2011.

These figures are not as significant as they could be. Setting aside the impact that might have been achieved by introducing this change in 2013 alongside or instead of ATED, de-enveloping a property is not straightforward, particularly at the moment, when the full effect of the 2015 proposals are still unknown.

If there is borrowing secured against the property, there will be an SDLT charge. Capital gains tax can also arise. The government acknowledges there are these costs associated with de-enveloping, a double whammy for those who chose to purchase using a company and pay the annual charge for the protection afforded only to find the protection will cease to apply and there will be a cost to de-envelope.

It has been suggested that relief may therefore be made available. So, while some clients have started the process of de-enveloping, many are waiting to see what, if any, relief they may benefit from - add to this that the full details of the IHT exposure are still unknown, and what you have is a lot of uncertainty. This is unsettling for clients and frustrating for their advisers.

Clarity on these points would enable us to fully advise our clients and would, I expect, see an increase in the number of properties being de-enveloped, thereby achieving what the government has been working towards for the last four years.

Hopefully we will not have to wait too much longer. With the changes planned for April 2017, time is ticking away.

Kate Johnson is an associate at Wedlake Bell @WedlakeBell www.wedlakebell.com