Prior planning prevents tax-poor performance
Recent changes in residential property tax are confusing for us all. But for our many non-domicile residents, or people who are considering a move to the UK, the sheer array of potential pitfalls must leave them begging the question whether UK property ownership is worth the aggravation?
However, London and indeed the UK, remain attractive for investment opportunities and many people genuinely want to live and work here for at least some of the year. So with advice and careful planning there should be little reason not to do so.
The tax changes brought in since 2012 mainly affect properties valued at £1 million or more. But, let’s get one thing out of the way, the good news is that there is no ‘Mansion Tax’ – the threat of implementation was scotched by the 2015 election.
The most hard-hitting taxes are:
- Stamp Duty Land Tax (SDLT)
- Annual Tax on Enveloped Dwellings (ATED)
- Capital Gains Tax (CGT)
- Inheritance Tax (IHT)
However, a new Inheritance Tax (IHT) exemption announced in the July 2015 Budget (to take effect from 6 April 2017) provides limited compensation for some.
So what of the three other taxes?
SDLT is here to stay and whilst the rates have increased in recent years, the mechanism is well understood and is paid by the buyer on a purchase price over £125,000 at the applicable rate and there is no longer straight banding.
Purchases through a company can attract a significantly higher rate of SDLT and beware there is overlap with ATED: relief from the higher rate of SDLT is available in certain circumstances, in particular for residential property bought for investment purposes.
So what of ATED? This arrived amid fanfare from 1 April 2013 to minimise the tax exemptions enjoyed by those owning high value properties mainly through companies, whether UK or non-UK resident. High value originally meant over £2 million, but this has crucially reduced to £1 million from 1 April 2015 and will further reduce to £500,000 from 1 April 2016.
ATED is also banded and exemptions and reliefs include commercial use i.e. arm’s length letting; or development and resale. The valuation date is 1 April 2012 or the date of acquisition if later, with a revaluation every five years. Whilst many took the opportunity to de-envelope properties and instead own the asset personally, there are many legitimate reasons not to and the impact of IHT should not be underestimated. Clearly this was also recognised by the government and in an unexpected move (announced in the July 2015 Budget) the IHT protection afforded to non-UK domiciled individuals, by enveloping UK residential property in non-UK structures, will cease to apply from 6 April 2017.
There have been few changes to CGT beyond the rates, although this year changes to Principal Private Residence relief, and its extension to include non-residents from 6 April 2015, have brought more property disposals within its reach.
So what about ATED-related CGT? This was introduced to catch disposal of properties owned by corporate entities that fall within the scope of ATED but would otherwise be outside the scope of CGT. In principle, if ATED is payable then CGT will also be potentially payable on a “disposal” of the property. This includes properties being transferred by gift and other means.
The July 2015 Budget presented us with some other fundamental changes in respect of the calculation of IHT, proposed to take effect from 6 April 2017. This includes the benefit of an additional Nil Rate Band (NRB) of up to £175,000 on the family home passing to your descendants. For those owning UK property there will potentially be an exemption of up to £500,000 being the existing NRB of £325,000 and the new property-related NRB of £175,000. For a husband and wife the total exemption could be £1 million up from £650,000. A potential tax saving of £140,000 with good planning for those affected.
The proposals to attach the IHT liability to offshore enveloped dwellings will be the subject of consultation, so how this will be undertaken in practice has yet to be clarified. We will all have to wait for the draft Finance Bill, which will be with us in the autumn 2015.
Private individuals, those owning properties in existing structures and those planning to acquire property in the UK through a corporate entity should take the opportunity to evaluate their options.
So is there still a place for tax planning in residential property ownership? Absolutely, but what is essential is to take advice and to plan. These taxes overlap and interact and, for the unwary, there are pitfalls and no-one wants to pay more tax than they legitimately have to.