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1 Private Client Services Residential property Charges for non-natural persons March 2013

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3 Residential property: charges for non-natural persons The 2012 Chancellor s Budget contained a number of announcements that will affect the ownership of UK residential properties. Specifically, the proposals are focused on non-uk corporate or other non-natural structures holding UK residential property, known as envelopes, which are frequently used by owners of expensive property to obtain UK tax benefits by means of indirect ownership. Proposals related to the increase of Stamp duty land tax (SDLT) on the acquisition of expensive property have already been introduced. However, this is only a part of the proposed package of measures aimed to tackle tax avoidance, which will be introduced in 2012 and The 2013 Budget, delivered on 20 March 2013, has confirmed that these rules will be introduced. The following three changes are proposed: Firstly, introduction of a special SDLT rate of 15% which will apply to the acquisition of residential property by non-natural persons (came into force in 2012). Secondly, introduction of an annual tax on enveloped dwellings (ATED) on the value of the above mentioned property held by the same group of non-natural persons (will be introduced in 2013). Thirdly, extension of the capital gains tax (CGT) to tax the same group of non-natural persons on disposal (will be introduced in 2013). It should be mentioned that the above proposals refer to UK residential property valued at more than 2mn (each interest is evaluated separately). The notes below, which describe the second and third changes, are based on the draft legislation and responses to the May consultation which were published in December 2012/January SDLT SDLT has historically been a one-time transaction tax, payable in the UK by the buyer, on the purchase of land and/or property or the acquisition of an interest in land or property. On 21 March 2012 a new SDLT rate of 7% was introduced. This rate is applicable to residential properties valued at more than 2mn. However, where the purchaser of such residential dwellings is one of a specified class of non-natural persons, a special SDLT rate of 15% will apply (with some exemptions). Non-natural persons means companies (which are defined as bodies corporate), collective investment schemes and partnerships where at least one of the partners is a company. In all cases, it is irrelevant whether these are UK or non-uk entities. Where there are joint purchasers, it is enough that one of the joint purchasers is a non-natural person for the acquisition to be wholly subject to the 15% rate. The following are, however, excluded from the 15% rate charge: Property developers that acquire an interest in the property in a course of a bona fide property development business for the sole purpose of developing and reselling the property, provided that it (or a company within its 75% group) has carried out this business for at least two years prior to the acquisition. A trustee which is a company but which is acting as a trustee of a settlement (i.e., a trustee who is not acting as a bare trustee). 1 Residential property Charges for non-natural persons

4 In addition, new exemptions are to be introduced with effect from Royal Assent to Finance Bill 2013 which will mirror those for the ATED (see below). An acquisition of six or more residential properties (which due to specific deeming rules would normally be regarded as non-residential for SDLT purposes) will still be treated as residential property for this purpose. This new SDLT rate will only affect property that is acquired by non-natural persons from 21 March 2012 and not properties already held in these vehicles. The ATED will be indexed to the Consumer Price Index (CPI) and uprated in April each year based on the CPI of the previous September. However, it appears that there is no proposal to index the property values and, hence, the bands themselves. Property Trading Businesses: dwellings held for the purpose of a trade of buying and selling property and not occupied at any time by a connected person. Transitional provisions also apply in respect of certain contracts entered into, but not completed, before 21 March ATED The ATED is planned to be in the range of 0.3% to 0.75% of the property value with properties placed in bands of increasing value. Initially, the charge will be capped at a maximum of 140,000 per annum. The ATED will only apply to residential property with a value in excess of 2mn. Owners of property with a value below, but close to, 2mn may need to take action to ensure that they are indeed outside the charge (see the Valuations section). For the ATED, a non-natural person is defined as companies and other bodies corporate, collective investment vehicles and partnerships including one or more such entities. Specifically, for 2013/14, the proposed ATED is: Properties valued at over 2mn but not exceeding 5mn 15,000 Properties valued at over 5mn but not exceeding 10mn 35,000 Properties valued at over 10mn but not exceeding 20mn 70,000 Properties valued at over 20mn 140,000 2 Starting from 1 April 2013 the charge for the first five periods of account (each period will run from 1 April to 31 March) will be based on the value of the property or interest in the property at: 1 April 2012 (if owned at that date). The date of acquisition (if later than 1 April 2012). The date of any creation or cessation of a relevant property interest (if later than 1 April 2012). A series of reliefs will be introduced to excluded genuine businesses carrying out genuine commercial activity. These will include reliefs for: Property Development Businesses: dwellings held for the purpose of the property development trade of the company and not occupied at any time by a connected person. Property Rental Businesses: dwellings held for the purpose of letting to third-parties for rent on a commercial basis and not occupied at any time by a connected person. Properties which are run as a businesses: properties open to the public with access to the interior for at least 28 days per year on a commercial basis, as a venue, location or to provide accommodation or other services. Dwellings held to provide employee accommodation: property held for the use of employees (with less than 5 per cent interest in the company) of the non-natural person, for the company s commercial purpose. Charities: dwellings owned by charities and held for charitable purposes, unless occupied by a substantial donor to the charity. Farmhouse: for situations where a working farmer occupies a farmhouse connected to the farm land for the purposes of farming the land. Certain other diplomatic, publicly owned properties, or property conditionally exempt from inheritance tax. Residential property Charges for non-natural persons

5 Valuations It will be the responsibility of the property owners to obtain valuation reports or self-assess their property s value in time for the introduction of the charge, i.e., by 1 April Non-natural persons who own a property with a value in the region of the 2mn threshold may be subject to penalties if they do not take proper care to establish a correct valuation and investigation by HMRC concludes that the value of the property exceeds 2mn. Penalties will also apply where an HMRC investigation concludes that the property is worth more than 2mn and the owner s initial valuation was low due to negligence. Those who have not obtained a professional valuation will be particularly at risk of a penalty. The Government is introducing a pre-return banding-check service. It is expected that this will be available from June 2013 but will only be available to properties with a value of within 10% of one of the thresholds. Properties must be re-valued every five years for the purpose of the charge, so a further revaluation will be required by 1 April 2018 (at which point the property must be valued as at 1 April 2017). There is currently no indication that there will be any opportunity to revalue before this date, for example, to reflect a fall in property values. ATED returns Affected property owners will be required to complete an ATED return providing information in respect of each residential dwelling with a value in excess of 2mn. Normally, the return will need to be submitted by 15 days after the commencement of the period of account as defined above, i.e., by 15 April each year. However, special rules will apply for the first year and it is likely that the due date for the first return will be 1 October Where a property leaves the envelope during the period, the property owner can claim a repayment on a pro-rata basis. Where a property enters the envelope during the period, a return will be required within 30 or 90 days and the charge will be pro-rated. A property owner who considers that an exemption to the ATED applies will need to submit a return to claim that exemption each year. Full payment will be due at the same time as the return is submitted. 3 Residential property Charges for non-natural persons

6 New capital gains tax charge for non-natural persons At present, non-uk residents are outside the scope of CGT even in respect of UK land and property. Anti-avoidance legislation treats gains on disposals by non-uk resident companies and trusts as accruing to UK resident individuals in certain circumstances. The new proposals extend the CGT regime to tax gains on UK residential properties on disposal by a non-natural person. The new rules will apply both to UK resident and to non-uk resident nonnatural persons. However, in order to be consistent with the SDLT charge and the ATED it is intended that the extension of CGT will only apply where the amount or value of the consideration for the disposal exceeds 2mn. The new rules will apply to disposals on or after 6 April 2013 but only the gain arising from that point (i.e., by reference to market value as at 5 April 2013) will be taxed. Where gains would be taxed under the present CGT regime, that regime will continue to apply to the gain accruing up to 5 April It will be possible to elect for the full gain (i.e., including that accruing up to 5 April 2013) to be calculated under the rules of the new regime and then time apportioned between the gain arising before and after April This election may be beneficial where the increase in value has not been uniform over the period or where losses would otherwise arise in one of the two periods. The definition of non-natural person for the purpose of the extension of CGT will include all those included in the ATED and SDLT (i.e., companies, collective investment vehicles and partnerships including one or more such entities). Initially the Government has proposed that other entities should be included in the definition for the purpose of the CGT charge, such as trustees, personal representatives and entities from other jurisdictions e.g., foundations. However, this proposal has now been dropped. The CGT rate will be 28%. The gain will be calculated following normal CGT rules, i.e., allowing for the deduction of the cost of the asset plus incidental expenditure but with no indexation allowance for inflation. There will be a form of marginal relief where the consideration is close to the 2mn threshold. Availability of reliefs Where losses arise on UK residential property in circumstances where a gain would have been subject to the new CGT rules, that loss may be set against gains in respect of UK residential property in the same or future years. Relief will only be available for losses down to the 2mn threshold and so will be restricted where the property cost less than 2mn. 4 Residential property Charges for non-natural persons

7 How Ernst & Young can help Those with residential property in an offshore structure (or owned in the UK by a non-natural person) should begin reviewing the structure now and may wish to consider restructuring their property ownership so that the structure does not fall within the new annual charge and CGT. We can help taxpayers quantify the impact of the new tax charges and decide whether they wish to restructure their property ownership. Unwinding a structure in some cases may bring immediate tax charges or remove potential tax benefits (e.g., inheritance tax). We can advise on these and generally help individuals consider the most appropriate course of action in their personal circumstances. We can advise those wishing to purchase a new property and help them evaluate alternative property ownership structures in the light of the new charges, You should speak to your usual Ernst & Young contact or one of the people below about the impact of the changes. Contact information London Carolyn Steppler Petr Medvedev Audrey Lydon T: E: csteppler@uk.ey.com T: E: pmedvedev@uk.ey.com T: E: alydon@uk.ey.com Anton Ionov Maria Detkina Anna Savon T: E: anton.ionov@ru.ey.com T: E: maria.m.detkina@ru.ey.com T: E: anna.savon@ru.ey.com Moscow 5 Residential property Charges for non-natural persons

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