The UK Government Budget announced by Chancellor George Osborne on 21 March 2012 (the Budget) makes substantial changes in relation to the structure of stamp duty land tax (SDLT).
The UK Government Budget announced by Chancellor George Osborne on 21 March 2012 (the Budget) makes substantial changes in relation to the structure of stamp duty land tax (SDLT). Two new rates were introduced to this regime that will affect those purchasing high value residential property:
SDLT of 7 per cent on residential property where the purchase price is over £2 million. The new rate will take effect for transactions where the effective date (normally the date of completion on the property) is on or after 22 March 2012
SDLT of 15 per cent on residential property where the purchase price is over £2 million and the property is bought by a non-natural person (generally a company). The new rate will take effect for transactions where the effective date is on or after 21 March 2012.
The rates will apply to freehold purchases and leasehold assignments.
SDLT is imposed upon any land transaction that involves the acquisition of a chargeable interest in land in the United Kingdom. The current rate of SDLT for high value residential properties (i.e., where the purchase price is £1 million or more) is 5 per cent. This rate applies regardless of whether the buyer is an individual, a company or any other entity.
Following the Budget, the 5 per cent rate will continue to apply to residential transactions where the chargeable consideration is more than £1 million, but not more than £2 million.
The 7 Per Cent Rate
Individuals who purchase a residential property in the United Kingdom will now be subject to a rate of 7 per cent SDLT on the chargeable consideration where this exceeds £2 million.
The rate is confined solely to properties with a residential purpose; it was not extended to the commercial sector where transactions are regularly structured through special purpose vehicles (SPVs). The top SDLT rate for commercial properties worth over £500,000 remains 4 per cent.
The definition of residential property has stayed the same: a property that is “suitable for use as a dwelling”. However, the types of properties that fall into this category have been reduced; residential accommodation for school pupils and the armed forces will not be subject to the 7 per cent tax. Other types of property that are excluded from the definition of “dwelling” and thus fall outside the SDLT changes include cares homes and halls of residence for students.
The 15 Per Cent Rate
There had been widespread speculation for some months regarding the Government’s intentions to target individuals who purchase properties in the United Kingdom through offshore companies as a means of avoiding SDLT. The increase of SDLT liability for non-natural persons holding UK property was therefore to be expected. However, the extent of the new liability has surprised many.
Companies, collective investment schemes (including unit trusts) and partnerships involving companies (called “non-natural persons” in the Budget), including non-UK vehicles, which purchase a residential property in the United Kingdom, will now be subject to a higher rate of 15 per cent SDLT on the chargeable consideration where this exceeds £2 million. The Government believes that this measure will increase “fairness” in the tax system and tackle a popular means of tax avoidance.
The term “non-natural person” has been defined broadly so as to be readily modified to catch new structures created solely in order to avoid the new rate. The Chancellor gave a stark warning during his Budget speech that he will “not hesitate to move swiftly, without notice and retrospectively if inappropriate ways around these new rules are found. People have been warned”.
It is important to note that exclusions from the increased charge have been introduced for corporate trustees purchasing property in their capacity as trustees of a settlement, and for bona fide property developers meeting certain qualifying conditions.
The Budget did not extend the new or existing rates of SDLT to the sale of shares in overseas companies that own property in the United Kingdom. However, Mr Osborne did announce the possibility of two further taxes that will further impact companies holding residential properties in the United Kingdom:
Capital gains tax on the sale of UK residential property owned by non-UK resident non-natural persons only
An annual tax charge on high value residential property owned by certain non-natural persons (the so-called mansion tax).
The imminent Government consultations regarding these two proposals are likely to result in the new taxes being introduced from April 2013 (through Finance Bill 2013).
As a consequence of the new changes and the potential changes, investors will inevitably be reluctant to use a corporate structure to buy residential property in the United Kingdom and, where investment has already been made using a company, careful consideration regarding the current ownership structure will be imperative.