This is a commentary by Withers on developments in tax of prime residential properties in the UK. People from countries across Asia, such as India and China, for example, have been strong buyers of such property, so they need to be aware of the rule changes.

Editor's note: This is a commentary by Withers on developments in tax of prime residential properties in the UK. People from countries across Asia, such as India and China, for example,  have been strong buyers of such property, so they need to be aware of the rule changes. This publication is delighted to carry this detailed commentary, although it stresses that it does not necessarily endorse all the advice here.

Since the publication of the consultation paper “Ensuring
the fair taxation of residential property transactions” in March 2012, which
set out proposals for a new annual charge and capital gains tax charge on
non-natural persons (‘NNPs’) holding high value UK residential property, NNPs
have been awaiting the publication of the Finance Bill 2013 with some anxiety.

Now that (at least some of) the detailed legislation has
been published, time is of the essence if action is to be taken before the
proposed rules come into force.

There is good news and bad news for NNPs. Clarification and
exemptions announced mean that neither the annual charge nor the capital gains
tax will be as far reaching as originally feared. However, as always the devil
is in the detail of the draft SDLT rules issued today, but although the
proposals relating to the new capital gains tax rules are refined in HM
Treasury’s summary of responses to the consultation, draft legislation setting
out the details of these rules has not been published and is not expected until

January 2013. NNPs may well need to take steps before then
to ensure that they can complete any restructuring before the new annual charge
rules come into force on Monday 1 April 2013.

1. Annual residential
property tax (‘ARPT’)

The ARPT will be payable by NNPs who have a beneficial
interest in a UK
residential property worth more than £2 million ($3.26 million).

1.1 Who will be
liable?

Liability to the ARPT will be restricted to companies,
collective investment schemes and partnerships which have a company as a
partner, wherever they are resident.

Trusts, whether onshore or offshore and whether or not they
have personal or corporate trustees, will not have a liability to the ARPT.
Further, a number of significant exemptions will apply to ensure that ‘genuine
businesses carrying out genuine commercial activity’ are excluded from the
charge.

Relief will be available for:

(a) Properties exploited in a property development, trading
or rental businesses

provided the property is not occupied by a ‘non-qualifying
person’. The definition of ‘non-qualifying person’ is extremely wide and will
include any beneficial owner person connected with them, including for example,
the child or other relative of the settlor of a trust which holds residential
property through a NNP.

The current requirement for a property development business
to have been

carried on for two years has been dropped for the ARPT.

(b) Properties exploited as part of a trade under which the
property is available for

use or enjoyment by the public at least 28 days a year on a
commercial basis.

(c) Properties owned to provide employee accommodation.

(d) Properties held by charities for charitable purposes.

(e) Farmhouses, which are of a ‘character appropriate’ to
the land being farmed and

are occupied by farm workers and also certain other
properties.

It should be noted that even where a relief is available, it
will have to be claimed each

year. The first returns will need to be filed by 1 October
2013. In future years returns will need to be filed by 30 April each year. Any
charge due must be paid by 31 October in each year.

1.2 How much will
they pay?

The rate of the ARPT is unchanged:

Taxable value of property Annual chargeable amount

£2 million - £5 million £15,000

£5 million - £10 million £35,000

£10 million - £20 million £70,000

Greater than £20 million £140,000

The “chargeable period” will run from 1 April to 30 March of
each year (rather than

following the tax year). Where the ARPT is applicable for
part only of a chargeable period, the annual chargeable amount will be
apportioned accordingly.

The ARPT will be index-linked (annually to the CPI), but the
thresholds will remain

constant in nominal terms. Residential properties will need
to be valued every five years, with the first valuation point being 1 April
2012 to see which level of charge applies.

2. Capital gains tax

The new capital gains tax regime will apply to the disposal
of a UK
residential property for more than £2 million on or after 6 April 2013.

2.1 Who will be liable?

Non-UK resident NNPs holding high value residential property
will only come within the scope of the new capital gains tax charge if they
fall within the scope of the ARPT, so that those non-UK resident NNPs who
qualify for the reliefs set out above will not be subject to the capital gains
tax charge.

This change ensures consistency between the two charges – a
consistency that was

lacking under the original proposals. In particular this
will be welcome news for non-UK resident corporate trustees and also those who
rent properties to third parties, who will now remain outside the scope of the
capital gains tax charge where they hold high value residential property
directly.

2.2 How much will they pay?

(a) Gains subject to the charge In acknowledgement of the
fact that non-UK resident NNPs have hitherto been outside the scope of UK
capital gains tax, capital gains tax will only be payable on gains attributable
to increases in value post 6 April 2013 i.e. a rebasing is available.

The mechanism for the rebasing and whether a formal
application will have to be

made to benefit from the rebasing should be clarified in
January 2013.

(b) Rate of tax

The applicable rate of capital gains tax will be 28% with a
‘tapering relief’ available where the value of the property falls ‘just’ over
the £2 million threshold.

2.3 The sting in the
tail

The proposed rate of tax payable by non-UK resident NNPs is
above that currently paid by UK
resident companies. The Government is therefore to consider whether to extend this
capital gains tax charge to UK
resident companies as well.

3. Stamp Duty Land Tax

When the consultation was announced in March this year, the
rate of SDLT on purchases of residential property by NNPs was increased to 15
per cent. These rules will now also be amended to incorporate the same reliefs
as will apply for the ARPT, so that the 7 per cent rate will apply to persons who
would not be subject to the APRT. Payment of the 7 per cent rate will be
conditional on the appropriate relief applying for three years following the
purchase and the property not being occupied by a non-qualifying person in that
time.

However, the amendments will only be effective from the date
of Royal Assent of the Finance Bill 2013 (which is expected in June/July 2013)
and so there will remain a period of time during which the existing rules will
continue to apply.

Conclusion

The detailed rules announced today, in general represent a
sensible reduction of the scope of the new rules, while preserving their
original intention. Many NNPs who had previously contemplated a frenzied period
of restructuring to put in place a new structure before the 6 April deadline
will now need to reconsider to see whether any action is in fact required. Some
may now fall entirely outside the scope of the new charges and others may
consider them an acceptable burden, particularly when the benefits of NNP
structures from a privacy, inheritance tax and (following the Court of Appeal
judgement in Prest v Prest) divorce perspective.

In considering any options for new property purchases, NNPs
and their beneficial owners should consider the impact of the General
Anti-Abuse Rule (‘GAAR’) which will also apply from the date of Royal Assent of
the Finance Bill 2013. The GAAR provides for the re-characterisation of
transactions that are considered abusive so that any tax advantages can be
counteracted. While it seems that the GAAR is unlikely to apply to any steps
taken before Royal Assent, the creation of any new structures or

restructuring carried out after that date will be subject to
the new rules.

For those looking for alternative structure and seeking long
term stability, there are further uncertainties. While, in the Autumn
Statement, George Osborne appeared to rule out any new taxes on property for
this Parliament, the questions of; whether that ARPT will simply be a
pre-cursor to a mansion tax that applies to all high value residential property
and whether all non-resident property owners will in time be brought within the
scope of capital gains tax remain.