Update | Wealth management: resident, residential property transactions and capital gains tax

As part of this year’s consultation calendar HM Treasury sought the views of interested parties on over 35 tax policies that were announced in the 2012 Budget. Two consultations were published by the Treasury during the summer: round two of the Statutory definition of residence and reform: a summary of responses and Ensuring fair taxation of residential property transactions. Responses to these consultations, along with draft legislation, are expected on or before 11 December. Avid followers of the process will have seen David Gauke’s statement (18 September) confirming that the draft legislation will then be open for consultation until 6 February 2013.

Although these consultations aim to clarify, simplify and ensure fairness, it remains uncertain how practitioners can give the best advice to clients before the proposals become reality

Statutory residence test

In June 2012, the Treasury published a summary of the responses to the 2011 consultation, together with draft legislation.

The new test attempts to take into account both the amount of time spent in the UK and any other connections with the UK. One aim is to ensure that people cannot cease to be resident in the UK without significantly reducing their ties with the UK. Further, those whose life is (as a matter of fact) connected more with the UK than any other country will find it more difficult to remain non-resident.

The test is structured in three parts: the first dictates when an individual is conclusively non-UK resident (part A); the second identifies when an individual will be conclusively resident (part B); and the third attempts to deal with individuals with more complicated residence situations (part C).

An individual will be conclusively non-UK resident (part A) if he:

1. is an ‘arriver’ (has not been resident in the UK in any of the last three tax years), and spends fewer than 46 days in the UK in the current tax year;

2. is a ‘leaver’ (has been resident in the UK in at least one of the last three tax years) and spends fewer than 16 days in the UK in the current tax year; or

3. is a ‘full-time worker abroad’ (he leaves the UK to carry out full-time work abroad) and spends under 90 days in the UK (fewer than 20 of them working) in the current tax year. HM Treasury are consulting further on the alternatives of whether to increase this to 25 days to increase the number of hours which may be spent working in the UK from three to five hours per day.

Individuals will be conclusively UK resident (part B) if they:

1. are present in the UK for 183 days or more in a tax year;

2. have their only home, or all of their homes, in the UK; or

3. work full-time in the UK.

The 2011 consultation proposed that an individual should be classed as working full time in the UK if he is employed or self-employed in the UK over a continuous period of nine months, with no more than 25 per cent of his duties carried on outside the UK during the period. The government is now asking whether this period should ?be extended to 12 months, with no more than 25 per cent of duties carried on outside the UK.

The third test (part C) is based on the principle that, in more complex situations, an individual’s residence should reflect not only the time he spends in the UK, but also the other UK connecting factors and identifies a list of connecting factors which, when linked to periods of time spent in the UK, will be relevant to an individual’s residence.

The connecting factors  are that the individual:

1. has a spouse, common law partner or minor children who are resident in the UK;

2. has accommodation in the UK available for use (for a continuous period of at least 91 days), and the individual does in fact make use of it at any time (for at least one night) during the relevant tax year;

3. does substantive work in the UK for 40 days or more in a tax year;

4. spent 90 days or more in the UK in either of the last two tax years; and

5. (for leavers only) spends more days in the UK in a tax year than in any other single country.

These will be combined with days spent in the UK into a scale to determine whether or not the individual is resident here.

There are separate day-count scales for those that have not previously been resident in the UK (arrivers) and for those that have previously been resident in the UK (leavers) to reflect the fact that residence is adhesive – in other words, it should be harder for leavers to relinquish residence than for arrivers to acquire it.

The draft legislation aims to put split year treatment on a statutory footing but, as drafted, it appears to be more restrictive than the current concession. Let’s hope for further refinement as a result of the consultation process.

 

Arrivers	Connections	Status
Fewer than 46 days		See Part A
46 to 90 days	Can have three UK connecting factors	Not UK resident.
91 to 120 days	Can have two UK connecting factors	Not UK resident.
121 to 182 days	Can have one UK connecting factor	Not UK resident.
183 days +		See Part B

 

 

Leavers	Connections	Status
Fewer than 16 days		See Part A
16 to 45 days	Can have three UK connecting factors	Not UK resident.
46 to 90 days	Can have two UK connecting factors	Not UK resident.
91 to 120 days	Can have one UK connecting factor	Not UK resident.
121 to 182 days	Can have no UK connecting factors	Not UK resident.
183 days or more		See Part B

 

Residential property transactions

New measures, affecting how UK residential property worth over £2m is owned and purchased, were proposed in a consultation document published on 31 May 2012.

The aim of the new measures is to quash stamp duty land tax (SDLT) avoidance achieved by purchasing properties via “non-natural persons”, in other words, buying shares in existing property holding companies, which are not subject to SDLT and, if offshore, may not be subject to stamp duty either. Such a structure is known as an envelope.

Two new rates of SDLT were introduced in the 2012 Budget: a 7 per cent rate for residential properties over £2m purchased by natural persons and a 15 per cent rate for properties over £2m purchased by non-natural persons.

For SDLT purposes, a “non-natural person” includes companies (except when acting as trustee), partnerships (where one or more of the members is a company) and collective investment vehicles.

Two additional measures were proposed with the intention of encouraging?“de-envelopment” and deterring future enveloping.

These measures take the form of an annual charge levied on non-natural owners and the extension of the UK’s capital gains tax regime to non-UK resident, non-natural persons. The added complication being that the definitions of “non-natural persons” differ for both the annual charge (which follows the SDLT definition) and the capital gains tax (CGT) charge.

The annual charge is due to come into force from 1 April 2013. It is, in effect, a brand new type of tax. It will also apply to UK residential properties valued over £2m owned by non-natural persons.

Property values will be self-assessed and submitted to HMRC as part of an annual charge tax return and HMRC will have powers to enquire into returns and raise assessments so that non-compliance can be effectively challenged.

Capital Gains Tax

Under the current proposals, sales or transfers of UK residential property over £2m by non-UK resident, non-natural persons will be caught by the CGT regime. It will also apply to any gains on the disposal of assets (of whatever form) that represent, directly or indirectly, relevant UK residential property. The latter category includes shares, interests or securities in a property-owning company where more than 50 per cent of the value of the asset is derived from UK residential property.

Interestingly, because the proposal is that the non-natural person is taxable, disposals of representative assets by natural persons would appear not to be caught. The feeling is that this is not the intention and that further clarification will be given.

“Non-natural person” for CGT purposes is a general term that applies to any person who is not considered to be an individual, so companies and other bodies corporate, trustees (even if they are individuals), collective investment vehicles, personal representatives, clubs, associations and entities that exist in other jurisdictions that allow property to be held indirectly. Bare trustees are excluded.

The biggest concerns for private wealth practitioners are the proposal that CGT will apply to the total gain accrued during ownership (rather than just the gain accrued after implementation of the new rules) and the lack of information about how the new CGT rules will interact with existing CGT anti-avoidance provisions. The consultation document only went so far as saying they “will be considered with the aim of avoiding unnecessary complexity and to ensure a sensible prioritisation of charging provisions”.

The extension of the capital gains tax regime is due to take effect from 6 April 2013. Wealth advisers have lobbied for a deferral of the introduction of these additional rules; as with the delayed introduction of the statutory resident test. Considerable work is needed to ensure any extension of the CGT regime interacts in a fair and certain manner with existing CGT legislation and we hope that there will be some form of rebasing mechanism or extension of reliefs so as not to impose unfair retrospective taxation. Many have suggested that this measure warrants a separate consultation in its own right.