In Budget 2012, the Chancellor launched an attack on high-value residential properties and perceived tax avoidance
New 7% SDLT rate
For residential property purchased for more than £2m, a new 7% rate of SDLT was announced. This applies to transactions with an effective date of on or after 22 March - the day following the Budget - subject to some transitional rules for those transactions where contracts were signed before that date.
Coming so soon after the introduction of the 5% rate for residential property bought for more than £1m, this is another unwelcome SDLT increase for buyers of high-end residential property.
This new 7% rate uses the traditional definition of 'residential property', which means that any mixed-use development is treated as non-residential, so only 'pure' residential properties will be caught by this higher charge.
New 15% SDLT rate
The Budget also contained an attack on perceived tax avoidance where a 'non-natural person' - for example a company, a partnership which has a corporate member, or a collective investment scheme - acquires residential property worth more than £2m.
The new charge applies to any such transactions, with an effective date of on or after Budget day (21 March), subject to some transitional rules for contracts signed before Budget day.
Because the Government is targeting what they see as tax avoidance, a tougher approach has been taken as to what is 'residential property'. Where a mixed-use development is purchased, an apportionment of the purchase price has to be made between the residential and non-residential elements.
Once the apportionment is done, the residential element has to be analysed to see whether it consists of an interest in one or more single dwellings to which chargeable consideration of more than £2 million is attributable.
For example, if a company buys a block of 10 identical flats for £10m, the new 15% SDLT rate will not apply, as the per-dwelling value is £1m. If, however, 10 identical flats are purchased for £25m, then the per-dwelling value is £2.5m, and so the new 15% rate will apply.
Where the value of the individual flats differs, the process becomes more complicated. For example, if a company buys five flats for £5m, but one is worth £3m, and the remaining four are worth £500,000 each, the new 15% SDLT rate will apply to the £3m flat, but not to the remaining four flats.
A further point to note is that the definition of six or more properties as 'non-residential' is not applicable to residential properties costing £2m or more.
There is an exemption from this new 15% SDLT charge for 'property developers', providing certain conditions are met, one of which is that the purchasing entity has been carrying on a property development business for at least two years before the effective date of the transaction, which could cause problems for a number of developers. It remains to be seen if this will be amended as the legislation goes through Parliament.
Currently there is no exemption for high-end residential property funds which will be caught by the new charge.
In Budget 2012, the Chancellor announced that the Government will look at introducing an annual charge for certain non-natural persons (presumably those covered by the new 15% SDLT rate) which hold residential property worth over £2m.
We do not have details of how this charge will work or how much it will be, and legislation will be included in Finance Bill 2013.
Extension of capital gains tax
The Government will also consult on extending the capital gains tax regime to disposals of UK residential property by non-resident, non-natural persons; and to disposals of shares or interests in such property, with the aim of this coming into force in April 2013. Again, we do not have any further detail at this stage.
Budget 2012 signalled a strong attack by the Government on those buying 'high-value' residential property in a way which - at least in the Government's eyes - avoids SDLT.
Time will tell whether the legislation can be drafted in such a way to avoid catching innocent transactions, but anyone looking to purchase residential property worth more than £2m should consider carefully the impact of the new rules before doing so.