Annual residential property tax and capital gains tax rules for non-natural persons

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1 Annual residential property tax and capital gains tax rules for non-natural persons STEP is the worldwide professional association for practitioners dealing with family inheritance and succession planning. STEP helps to improve public understanding of the issues families face in this area and promotes education and high professional standards among its members. STEP has 18,000 members across 80 jurisdictions from a broad range of professional backgrounds, including lawyers, accountants, trust specialists and other practitioners. In the UK STEP has over 6,500 members and it supports an extensive regional network providing training and professional development. We welcome the opportunity to comments on the draft capital gains tax and annual residential property tax legislation issued on 31 December Our response is of a high level but general nature rather than detail focused, not least because, despite the Government s policy aim of producing draft legislation at least three months before its introduction to allow for scrutiny on complex issues, we had to wait until 31 January 2013 to see the legislation upon which our comments are sought in relation to capital gains tax (CGT). We are given to understand this legislation will come into force on 1 April 2013, just over 8 weeks after the latest draft was issued. Although the extension of time within which to comment is, of course, appreciated, the brevity of this period is unwelcome. 2. We would also comment that where changes have been made to published draft legislation, such re-issued draft legislation incorporating those changes, it would be helpful if it could be published with tracked changes to enable whose views are sought, in consultation, on the implications of such changes - particularly within such a short time frame (but preferably also when the more usual 12 week period applies) - to be able to scrutinise the changes with relative ease. 3. That said, we are pleased to see the introduction of a series of reliefs for genuine commercial activity which indicated that detailed consideration had been given to the responses made by interested parties to the Consultation. However, we would wish to see the exemptions extended in the circumstances detailed below. Policy 4. In terms of policy: 4.1 We are disappointed that, contrary to the Government s overarching aim of tax simplification, it proposes to introduce a new tax to prevent the exploitation of existing legislation in relation to stamp duty land tax (SDLT), rather than address the ineffectively drafted legislation to resolve the problem. Not only does the legislation introduce a completely new tax, it imposes additional compliance requirements which will be costly in time and fees for both clients and HMRC alike. All this complexity is created in pursuit of a policy which HM Treasury announced was not intended to raise revenue, but to deter enveloping and to create more equal tax treatment between UK residents and non-residents.

2 4.2 Indeed, we would suggest that the original goal has been achieved already in relation to high value properties, by the increase in the rate of SDLT for transfers to non-natural persons to 15% with effect from 21 March We would be interested in HMRC s statistics, if these exist, showing a trend to the contrary. 4.3 However, we feel that there is a risk that the fact that the SDLT rates for residential properties have gone to 7% and 15% could potentially have the following impacts: These higher SDLT charges now probably justify the cost of due diligence on a company by the purchaser (which might not have been the case in the past). The corporate entity still represents a way of reducing SDLT on the effective transfer of the property to nil. The CGT charge on annual residential property tax (ARPT) related gains will never arise if the property is not sold from the company. 4.4 The rebasing provisions as currently drafted will not incentivise UK resident non-domiciled individuals to de-envelope due to the interaction between the new rules and ss13 and 87 TCGA The rebasing rule seems only of benefit to non-resident structures where the beneficiaries/shareholders are all also non-resident. 4.5 While we understand that the incorporation of the ARPT and SDLT reliefs into the CGT legislation by reference, results in fewer pages of new legislation, it does nothing for the overall objective of tax simplification. Timing 5. In terms of timing: 5.1 Not only is there limited time to consider the detail of the draft legislation, the time limit within which clients are expected to re-structure their affairs to comply with the policy aim (see points below) is quite simply too short. It seems clear that a delay in implementation may not be countenanced. However, it would be helpful if the Government were to consider the introduction of transitional provisions for those who, for example, commence liquidation proceedings before 1 April 2013 in order to de-envelope, but who are unable to complete the process before that date. We believe this might encourage those who are minded to restructure to do so. Our suggestion would be that if liquidation proceedings are commenced before 1 April 2013, no ARPT will be due (and no ARPT return due) if the company is wound up before the first ARPT return is due in October We appreciate however, that it will be necessary to provide clear guidance as to when such proceedings are commenced. 5.2 When a liquidator is appointed a company loses beneficial ownership of its assets (CTM36125). The ARPT charge depends on a company having the beneficial interest in the property. Thus depending on the jurisdiction and law applying, it may be that the charge to ARPT ceases on appointment of a liquidator, and not on distribution of the property from the corporate liquidation.

3 Exemptions 6. We would wish to see the exemptions (SDLT, ARPT and CGT as appropriate) extended as follows: 6.1 Where a corporate vehicle holds the freehold of a property communally owned by leaseholders (who own shares in the freehold company). It is understood from the responses to the consultation that the aggregation of interests of the freeholders and leaseholders would be subject to de minimis limits, such that the aggregation should only take place where the whole significant value is in the company s interest. 6.2 Where (in relation to the property development/trading exemptions) an associate of the person beneficially entitled to the interest carries on that business. 6.3 Where farmhouses are occupied by retired farmers or contract farmers (particularly in relation to CGT and ARPT), so that the exemption is granted both by reference to the occupation and activity of farming. 6.4 Where, by virtue of the Chapter 5 of Part 3 of ITEPA 2003 (Taxable benefits: living accommodation) a director or shadow director is already within the charge to income tax, regardless of his or her actual interest. Restructuring debt 7. Our particular concern relates to the transfer out of corporate ownership, of properties which are subject to commercial debt, for the following reasons: 7.1 On the transfer of property subject to debt, without transitional, relieving or exempting provisions from a liability to SDLT on the assumption by the transferee of the liability, the imposition of an SDLT charge will be a disincentive to de-enveloping. 7.2 In addition, the possible application of anti-avoidance provisions, such as s75a FA 2003, where the debt is discharged prior to the transfer so that there is no assumption by the transferee of the liability and the property is re-encumbered shortly thereafter. Logistics of refinancing 8. In the event that clients seek to re-mortgage: 8.1 We understand that the credit committees of most banks do not come to decisions quickly in order to be considered, restructuring decisions would need to have been put before any committee in early February if restructuring is to be achieved by 1st April. It is clear that more time is needed. 8.2 In addition, where mortgages are re-negotiated, we understand that the fee is likely to be in the region of 1% of the property s value, and new interest rates are not nearly as competitive as those which clients may have been able to negotiate a few years ago. This is a disincentive which needs to be neutralised.

4 Technical points of principle 9. Turning from logistics and economics, to technical points of principle: 9.1 In relation to the draft ARPT legislation we are deeply concerned by the denial of statutory relief on the grounds of intention where, for example, at some stage, a non-qualifying individual might conceivably end up occupying a property intended for rental. We believe that this would be extremely difficult to police or indeed to prove, or more likely disprove, evidentially. The relief should be withdrawn on the basis of actual use, rather than intention. Equally, we consider that the relief should be allowed, as with other taxes, where the non-qualifying individual pays a full market rent for the property. 9.2 In relation to changes to the CGT legislation, we note that Sch 1 Part 3 para 18 refers to s225 TCGA applying s225 only applies where trustees owning property permit a beneficiary to occupy it. As such, it seems curious that these CGT provisions should refer to s225 TCGA if trustees directly holding relevant residential property are not intended to be within the scope of these provisions. The explanatory notes (para 44) add nothing to dispel this confusion. 9.3 It is not clear from the wording of Sch 1 paragraph 12 of the draft legislation which inserts new cl 226C (tapering relief for gains) to which amount the relevant fraction is to be applied on plain reading of the calculation in the legislation it appears that the tapered gain results in a higher tax charge, which cannot be the intended effect of the legislation, so clarity and more detailed notes in the explanatory notes are required. 9.4 We note that paragraph 1(4) of the draft ARPT legislation provides that "[a] company meets the ownership condition... on any day on which the company is beneficially entitled to the interest..." We take this to mean that a company acting as trustee is outside of the charge, and should be grateful for confirmation that trust corporations and other corporate trustees are not within the charge to ARPT or the new CGT charge. 9.5 We believe that it would be appropriate if entities akin to trusts established under foreign legal systems (such as foundations) were expressly excluded from the new charges in circumstances where they hold assets exclusively for the benefit of other persons. We do not believe that interests in such entities could typically be sold in order to avoid SDLT, and so it appears to us that they fall outside the overriding "mischief" of the legislation. Funding to pay the ARPT 10. We are also concerned about the treatment of the funding of the payments of ARPT where funds are needed in a trust to meet these liabilities These liabilities might be the SDLT on the transfer of a property subject to a debt out of corporate ownership or to meet the ARPT. Where the property is owned by a company which is owned by a settlement, will the provision of funds be treated as an addition to the settlement with the inheritance tax implications both as regards an entry charge and on the settlor? 10.2 We believe that s809v ITA 2007 should be extended so that the income or chargeable gains are to be treated as not remitted to the United Kingdom to the extent that funding for such liabilities is provided by a remittance basis user.

5 11. Finally, in terms of certainty, it is unsatisfactory to have legislation framed in relation to a commencement which is uncertain Royal Assent this is another unknown which will be a further disincentive to comply rather than an incentive. Submitted by STEP UK Technical Committee 22 February 2013