High value residential development: An update

High value residential development: An update


Author: Tom Wilde

As discussed in our earlier article, the Government launched an attack in Budget 2012 on high-value residential property and perceived tax avoidance

Please see: http://www.shoosmiths.co.uk/news/4107.asp).

Further details have since been published.

Whilst the new SDLT rates - 7% (for residential properties worth over £2m) and 15% (for residential properties over £2m acquired by companies, certain partnerships and collective investment schemes) - came into force immediately, other measures such as the new 'annual charge' and the extension of capital gains tax (CGT) to certain non-resident, non-natural persons will be enacted in Finance Bill 2013, with draft legislation published this Autumn.

It is these later measures on which the Government has published a consultation document, entitled 'Ensuring the fair taxation of residential property transactions'.

The title demonstrates yet again that the Government is moving away from whether something is legal or illegal being the test for whether tax is due, to a determination based on 'morality' or 'fairness'.

The aim of these new measures, like the new 15% SDLT rate, is to deter 'enveloping', i.e. the purchase of high value property by a company (usually a special purpose vehicle) and then transferring the ownership of the property in the future by selling the shares in the SPV rather than the property itself, with the result that stamp duty is paid at 0.5% rather than SDLT at, now, 7%.

Annual charge

The annual charge is payable by non-natural persons, i.e. companies and other bodies corporate, collective investment vehicles and partnerships with one or more such entities as partners.

One of the major criticisms at the time of Budget 2012 was that there are many other reasons, apart from tax avoidance, why someone may want to buy property through a company, e.g. maintaining anonymity, inheritance tax planning, protecting ownership, or to comply with laws in overseas jurisdictions. Therefore the Government's stated aim is to target the annual charge at situations where tax avoidance is a significant factor whilst minimising the impact for bona fide businesses.

The current exclusion for bona fide property development businesses only applies where the property was purchased with the intention of re-development and re-sale by a business which has been operating for a minimum of two years. Concerns have been raised about the narrowness of this exclusion and so the Government is requesting views as to how bona fide businesses can be unaffected whilst targeting tax avoidance. Whether this can be done satisfactorily remains doubtful.
The charge applies to residential property as well as the residential elements of a mixed-used property (in the same way that the new 15% SDLT rate does).

If the property is only owned by a relevant non-natural person for part of a year, then the charge is applied pro-rata.

The value of the property relevant for determining whether the charge applies and the amount of the charge is:

  • the market value of the property interest on 1 April 2012 (if the property was owned at that date)
  • the market value on acquisition, if later; or
  • the market value on any later creation or cessation of a relevant subordinate property interest

Properties will be revalued every five years and, as the charge is self-assessed, HMRC will expect to see a valuation obtained by a taxpayer from a suitably qualified valuer with penalties imposed for getting it wrong.

However to mitigate this it is currently suggested that HMRC and the Valuation Office Agency will offer a pre-return valuation checking service.

The rate of the annual charge is currently proposed as follows:

Property Value Annual Charge 2012-13
£2,000,001 - £5,000,000 £15,000
£5,000,001 - £10,000,000 £35,000
£10,000,001 - £20,000,000 £70,000
£20,000,001+ £140,000

Given the 'cliff-edge' nature of the charge, taxpayers can expect HMRC to look closely at any valuations which fall near the band margins.

The annual charge will be linked to the CPI and uprated in April each year based upon the previous September's CPI. Whether the rates of charge are high enough to persuade people to remove property from companies and other envelopes remains to be seen.

Extension of CGT

The aim of the extension is "to support the annual charge by creating a further deterrent to enveloping and to create more equal tax treatment between UK residents and non-residents."

This will again apply to residential property worth over £2m held by non-resident, non-natural persons. However the definition of non-natural persons for CGT purposes appears to be wider than that for the annual charge as it encompasses trustees and personal representatives. It remains to be seen how this will be resolved.

CGT will not just apply to gains made on the disposal of the property itself, but also to gains on the disposal of assets that directly or indirectly represent relevant UK residential property, e.g. shares, interests or securities in a property-owning company where more than 50% of the value of the asset is derived from UK residential property.

One key point to note is that the CGT extension will apply to the total gain accrued during the period of ownership, not just the portion of the gain accrued from the date that the new legislation comes into force. This means that existing trust and company structures will either need to be wound up or restructured in order to establish an up to date base cost.

There are a number of possibilities which can provide a solution and it is not entirely clear how HMRC will enforce the charge, although hopefully this will be made clear in the legislation.


As these changes are still the subject of consultation they may change before implementation. However they give a strong indication of the Government's thinking.

Anyone who is likely to be adversely affected by these changes is encouraged to respond to the consultation before it closes on 23 August 2012.

Should the proposals be enacted in their current form, enveloping high value residential property will become much more expensive in the future.