Plenary 3 CGT Update and Property Structuring John Barnett CTA (Fellow) TEP Partner, Burges Salmon
Topics CGT Update Residential Property Structures ATED, SDLT, CGT and IHT Conventional UK planning for RNDs and NRs
Part I CGT Update
CGT Consultation what we do and don t know 2015 rebasing probably with alternative of time apportionment Rate not confirmed (probably 28%) Company-owned tailored rate! Main residence relief: - Abolish elections for everyone? - Change statutory residence test? - 90 / 120 day occupation test + election? Unlikely to be a withholding tax Widely-held (non-close) companies exempt
CGT be careful about 2015 rebasing Companies already subject to CGT since April 2013 (if residential > 2m) (BVI) Company
CGT be careful about 2015 rebasing Trusts subject to CGT since 1981 if beneficiaries are or become UK resident Trust (+ company)
CGT be careful about 2015 rebasing Individual becomes UK resident (no rebasing on entry)
Part II Residential Property Structuring
Residential Property Structuring Other taxes to think about New rules since April 2012 Compliance issues Structuring options
Residential property structures: taxes to consider Already very complicated! - IHT - UK asset - CGT PPR or not - Benefit-in-kind shadow directors - SDLT deemed market value - POAT an existing annual tax - Income tax on rental income - Capital payments/benefits matching CGT and TAA
Residential property structures: other taxes Already very complicated! - VAT - Capital allowances - Stamp Duty - Corporation Tax - Permanent Establishment - Central Management & Control - Non-resident landlord scheme
New rules since April 2012
SDLT increases Property Value Commercial or mixed Residential Up to 125,000 0% 0% 0% 125,001 to 150,000 0% 1% 1% Residential owned by a company (no reliefs) 150,001 to 250,000 1% 1% 1% 250,001 to 500,000 3% 3% 3% 500,001 to 1m 4% 4% 15% 1,000,001 to 2m 4% 5% 15% 2,000,001+ 4% 7% 15%
ATED original rates Property Value Annual Charge 2 million to 5 million 15,000 5 million to 10 million 35,000 10 million to 20 million 70,000 More than 20 million 140,000
ATED new rates Property Value Annual Charge 2 million to 5 million 15,400 5 million to 10 million 35,900 10 million to 20 million 71,850 More than 20 million 143,750
ATED in 30 years time! Property Value (real terms) Annual Charge (actual terms) 20,000 to 50,000 45,000 50,000 to 100,000 105,000 100,000 to 200,000 210,000 More than 200,000 420,000
ATED in 2015 Property Value Annual Charge 1 million to 2 million 7,000 2 million to 5 million 15,400 + index 5 million to 10 million 35,900 + index 10 million to 20 million 71,850 + index More than 20 million 143,750 + index and a general mansion tax? NB valuation date 1 April 2012
ATED in 2016 Property Value Annual Charge 500,000 to 1 million 3,500 1 million to 2 million 7,000 + index 2 million to 5 million 15,400 + index 5 million to 10 million 35,900 + index 10 million to 20 million 71,850 + index More than 20 million 143,750 + index
CGT-ED April 2013 effective rebasing Post-April 2013 capital gain charged on the company Pre-April 2013 capital gain (and any relieved gains) may still be charged under mainstream CGT rules Rate 28% Taper relief between 2m and 3.2m (5/3 rule) Partnerships ATED vs CGT Losses capped
Compliance and practical issues
Valuations Valuation needed for ATED at 1 April 2012 Valuation (prospectively) needed for CGTED at 6 April 2013 Value needed even if reliefs are claimed Valuation needed if property extended or reduced (in time or space) Pre-return banding checks: - 1.8m to 2.2m - 4.5m to 5.5m - 9m to 10m - 18m to 22m
Valuations Can you get away with indexing acquisition cost? - < 1.6m - 2.5m - 4m - 6m - 8.75m - 12m - 17m ATED guidance asks for acquisition value (but probably means 1 April 2012 if later) Can you guess?
Reducing the property Value 4m @ April 12 Garden sold 250k 4m - 250k - 3.75m? Value 5.2m @ date of sale Reduction of property puts into higher band
Reliefs ATED is payable in advance Reliefs are claimable in arrears Interim relief may be available: - Facts must exist at the date of the claim - Assume those facts continue for the rest of the year - NOT assume facts will apply from some date in the future
Property rental businesses Being built VOID First tenant VOID Second tenant VOID NQI VOID Third tenant VOID sale/ demolition Non-qualifying individual spoils relief And pollutes previous voids in same and previous year And subsequent voids for next 3 years
Aggregation Of interests of connected parties Of freehold and leasehold(s) in same dwelling Of linked dwellings in same building Of dwellings in garden/grounds of a bigger dwelling
Other compliance issues Authorising your agent paper-based process Electronic forms can t save half-way through Reliefs must be claimed i.e. you still need to do a form. Bare trusts / nominees strictly no need to notify, but HMRC welcome protective notification (by post to HMRC, ATED, Room 3C/20, 100 Parliament Street, London, UK, SW1A 2BQ) Are you a company? (www.hmrc.gov.uk/manuals/intmanual/intm180030.ht m)
DOTAS Schedule 42 para 2 ATED is now a tax for DOTAS purposes HMRC proposes to require information on all ATED-avoidance schemes since 31 January 2013 (was 13 December 2012): - Where company ceases to own - Where value reduced into lower band or below 2m Limited exceptions: - Sales on arms length [was just to third parties] - Distributions (now including liquidations) - Group companies on arm s length terms - Where the transfer is a settlement (for IHT purposes) Disclosure by 17 January 2014 if caught!
Structuring options
What does this mean in practice? Existing structures - seven choices: 1.Do nothing 2.Let the property 3.Collapse the structure 4.Restructure 5.Wait and see 6.Open to the public? 7.Borrow to purchase
1. Do nothing Trust (offshore) Offshore Company Needs an active decision to do nothing IHT protection Confidentiality / succession / probate etc. ATED 2013 rebasing / sell the company Future purchaser could save 15% SDLT But: ATED liquidity issues Future ATED-related CGT if you can t sell the company
2. Commercial let Trust (offshore) Offshore Company IHT protection Confidentiality / succession / probate etc. Normal CGT / sell the company Future purchaser could save 15% SDLT No ATED but still need to file Tenant
3. Collapse the structure No ATED May be main residence for CGT Future proof? IHT: Confidentiality (nominee?) How to get there? - Relatively easy for non-residents - Trickier for RNDs
3. Collapsing the structure how? Liquidate company first (2008 rebasing)? vs IHT exit charge Trust (offshore) Offshore Company Appoint assets out of trust But post 2008 capital gains matched against post 2008 benefits Previous rent-free occupation of house may well be a benefit And that benefit by definition in the UK Consider same-year offshore capital payment? Possibly borrow to fund capital payment (but watch schedule 4B)
3A. Buy the property out of the company BANK Offshore Company Pay one lot of SDLT to buy the property out of the company Possibly purchase at undervalue? Borrowing should then be allowable (see below)
4. Restructure Trust (offshore) Trusts Double-Trusts Partnerships Options? Other bespoke solutions Offshore Company
4. Restructure Partnership? ATED only applies to partnerships with company member Incorporated partnership is not a company What is the situs of a partnership interest for IHT purposes? Consider coupling with borrowing? GAAR? Dec 2012 Government monitoring use of partnerships
Foreign incorporated partnership / LLP IHT what is the situs of the partnership interest? - Probably non-uk - Partnership therefore fulfils role of company in traditional structure - Therefore don t need a separate company - Other issues therefore easier to handle SDLT: - Restructuring no imputed market value - Restructuring special partnership rules but (100% - SLP%) - New purchase: capped at 7% ATED: no corporate partner natural person CGT: yes either way, may be PPR
4. Settlements Trust (offshore) Offshore Company Settlement defined differently for ATED and IHT May be able to find something which is not a settlement for IHT (no 20% / 6% charges) But is a settlement for ATED Of which an offshore company is the beneficiary? DOTAS and GAAR
4. Long lease Offshore Company Interests of connected parties normally aggregated 1.9m + 0.8m = 2.7m However, if company s interest < 500k then aggregation doesn t apply 0.4m + 2.3m = 0.4m Temporary fix?
5. Wait and See Needs to be an active decision Liquidators timescales Assume prices won t increase significantly for a few months from April 2013 Few months ATED First ATED returns now overdue!
6. Property open to the public Exploited as a source of income In the course of a qualifying trade In the normal course of which Public offered opportunity to make use of, stay in, or otherwise enjoy On at least 28 days a year
6. Property open to the public Qualifying trade = carried on on a commercial basis with a view to profit. Public must be able to enjoy a significant part of the interior Significant = size, nature and function of the areas concerned
7. Borrowing to purchase BANK Trust (offshore)
7A. Buyout of structure for undervalue Offshore Company Planning particularly in the 1m to 2m range Buy out of the company for an undervalue Pay one lot of SDLT to buy the property out of the company Borrowing should then be allowable BANK
Conventional UK planning for RNDs and NRs
The anti-avoidance minefield S102 FA 1986 GROB Schedule 20 supplements GROB provisions S103 self-generated debts s102a legislative response to Ingram s102b co-ownership without co-occupation s102za legislative response to Eversden SDLT POAT CGT Schedule 36 FA 2013 GAAR
So what still works? Downsizing before scheme put in place Physical carve-out Give away house pay full rent Give away share of house where co-occupation Give away disproportionate share of house where cooccupation Liabilities incurred to buy or improve the house (but watch s103)
So what still works? Reversionary lease of investment property (POAT is main downside but only if you occupy) Reversionary lease by pre 2006 IIP trust (anti-eversden legislation only applies to s102 not to s102a and B) Reversionary lease by trustees of IPDI Reversionary lease by a non-resident Reversionary lease to trust in which spouse has interestin-possession (lacuna in POAT)
So what still works? Gift of cash to build a granny flat (para 2 accretion provisions; s102a and B only to gifts of land; POAT only if contribution is to purchase) Gift of share of investment property Sell property to spouse in return for debt; give away debt (?)
Where does this leave residential property ownership? Rental property, still advantages in corporate ownership Otherwise personal ownership: - Borrow as much as possible - Make a Will - Elect as main residence if possible - Consider conventional UK structures For existing structures: - Be slow to get rid of your company - ATED 0.7%; IHT 40% - how old are your clients? - SDLT 15%; Stamp Duty on share sale 0.5% (max) - CGT changes make decision simpler
Plenary Statutory 3 Residence CGT update Test and September property structuring 2012 This presentation gives general information only and is not intended to be an exhaustive statement of the law. Although we have taken care over the information, you should not rely on it as legal advice. We do not accept any liability to anyone who does rely on its content.
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