The tax landscape for residential property owners has changed drastically in recent years, as the Government has felt obliged to address issues raised in the media regarding the residential property market.
The fiscal changes include measures which aim to reverse the trend for buyers to acquire property through vehicles, which can be used to minimise tax on capital gains and stamp duty land tax.
To deal with this, a hefty up front SDLT charge of 15% has been introduced where a ‘non-natural person’ – typically, a company - purchases UK residential property. There is also an annual tax, known as the ‘ATED’ (Annual Tax on Enveloped Dwellings) based on the value of the property.
The ATED is only intended to apply where the property is occupied by a person connected with the company as his or her private residence. However, although there is a relief from this charge where the property is let or otherwise used in a commercial way, that relief must be claimed annually – and penalties are being applied where the relevant form is not being submitted to HMRC on a timely basis.
In the past, non-UK residents have been exempt from capital gains on profit realised on the sales of property. This is no longer the case for residential property. Capital gains tax now applies to non-residents or their corporate vehicles.
The position can be potentially confusing as a special type of capital gains tax applies where the ATED is in point. The tax is applied at a fixed rate of 28% on any appreciation of the property since the property was subject to ATED. However, where the ATED capital gains tax regime is not in point, the normal capital gains tax rules apply on gains since 5 April 2015. The rate of tax in that case can vary from the standard 18% or 28% for individuals and trusts (depending on whether they are subject to higher rate income tax) or 20% for companies. The confusion can be compounded by the fact that properties falling in and out of ATED during their ownership (eg, because in some years they are rented out) may become subject to both types of capital gains tax for different periods.
The principal impact of these changes are going to be felt by non-UK based property investors, who will now be facing these extra fiscal costs of UK residential property ownership. In addition, the Government has also tightened up on the UK’s previously attractive ‘non-domicile’ status, such that long term UK residents are now caught by remittance charges and new deemed domicile rules.
In further measures intended to address the impact on the housing market caused by the stampede into buy-to-let property ownership by individual investors, the 2015 Finance Bill proposes new restrictions on tax relief for finance costs from 6 April 2017. There have also been revised rates of SDLT for residential property – leading to a new rate of 12% at the top end, although reduced charges apply at the lower end of the housing market.
Inevitably, behind the above are several hundred more pages of complex tax rules, complete with the usual plethora of pitfalls for the unwary.
Property Tax Planning, 14th Edition, authored by Philip Spencer, is a comprehensive guide to property tax, explaining the tax planning opportunities arising from buying and selling property, as well as the legal implications of property transactions. For more information, see: http://www.bloomsburyprofessional.com/uk/property-tax-planning-9781780434414/
Philip Spencer is a tax partner at BDO LLP within the firms Real Estate and Construction Tax group.