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LONDON (May 2): Changes to the UK's property regime in the next few years will be seismic. Anyone about to purchase or holding UK property that is valued at £2 million (RM9.81 million) or may become worth that in the future needs to carefully review their options.
For many years it has been customary and sensible for non-UK domiciled persons to purchase UK property in the name of an offshore company. This allowed the buyer to avoid UK Inheritance Tax (IHT) which would otherwise be payable on the death of the owner at 40% of the value of the property (after allowances).
An additional and increasingly important benefit of buying this way was that resale of the property could be effected by transferring the shares of the company, leaving the title to the property unaltered. This allowed the buyer to avoid stamp duty (now called Stamp Duty Land Tax, or SDLT). This made the purchase cheaper for the buyer or allowed the seller to charge more… or a bit of both.
In recent years the rate of SDLT has risen rapidly. In the most recent UK budget the top rate increased to 7% of the purchase price of properties valued at over £2 million. Raising the rate was designed to allow the UK government to collect more revenue, so not unexpectedly the increase was accompanied by legislation designed to prevent the tax being avoided.
With immediate effect a non-UK company that purchases residential property in Britain valued at over £2 million will have to pay SDLT at 15%.
The government also announced that as of April next year non-resident "non-natural persons" will pay capital gains tax (CGT) on the disposal of a UK property. Prior to these changes CGT was not payable in Britain on the resale of a property by a non-resident individual or entity. This is unusual as most countries charge CGT whenever a property within their jurisdiction is sold irrespective of who sells it and who buys it.
Non-natural persons are companies, unit trusts, partnerships and anything other than a private individual. Exceptions to the 15% rate are to be made for property developers and corporate trustees. So far there is no detail on exactly what that means.
UK domiciled persons also might want to purchase through a company so they can rearrange ownership easily and cheaply. There are many reasons why they might want to do this. For them corporate ownership initially achieves no IHT saving. IHT is payable on their worldwide estate and the shares of the company are worth exactly the same as the property. But, if they later obtain non-domiciled status they could transfer the shares to a trust and avoid IHT. If they remain domiciled they could transfer the shares to a Family Investment Company or to a suitable pension structure and avoid the IHT that way.
On the face of it new purchasers of UK property of £2 million or over (or a property that is likely to be worth £2 million or over in the future) are now caught between a rock and a hard place. Individual purchasers are liable to 40% IHT. Corporate purchasers avoid the IHT but pay 15% SDLT and probably will have to pay CGT.
The government is also considering introducing a "mansion tax" that would charge corporate owners of UK property valued at over £2 million an annual fee of between 0.3% and 0.7% per annum depending on value. This tax may not materialise as the government proposes to consult before introducing it.
It would seem that CGT could be avoided by transferring the shares in the company rather than selling the property. On a £2 million property that would save the individual buyer 7% at the current rates of SDLT and give him confidentiality and resale advantages. It would lock the buyer of the company into paying CGT based upon the original price paid by the company for the property (not the price he is now paying) if he was later forced to resell the property itself. In effect the new buyer is purchasing a company already pregnant with CGT. It could be that the legislation will seek to treat changes in ownership of the company as a change in the owner of the property and charge tax accordingly but this is thought unlikely due to difficulties in enforceability. The 15% SDLT charge on purchase was thought to be an alternative to this.
Setting up a trust with a corporate trustee to purchase the property would seem to give exemption from all the newly introduced penalty taxes. In theory it prevents the property from being transferred by a share sale but in practice it may well be possible for each buyer to set up a separate trust company for each property and to sell that trust company to transfer the property. Or the sale of the property could be made by simply changing the beneficiaries of the trust. This seems a little obvious so it may be that exemption from the new taxes is only granted for licensed or professional trust companies who offer the same service through the same trust company to a large clientele.
Discretionary trusts will be subject to the 10-year annual charge. The rate is normally works out to be about 2% to 3% of the property value but can be as high as 6%.
A Qualifying Non-UK Pension Scheme (QNUPS) will certainly avoid the new taxes. Pensions are generally given favourable tax treatment so purchasing through a QNUPS will avoid the CGT on resale and eliminate IHT as QNUPS are specifically IHT exempt. QNUPS, being a pension, can be a little bit restrictive but look a very attractive option for both UK non doms and doms.
For those who are already holding property in the name of offshore companies, the SDLT will not be a concern as it is only payable on purchase of the property. The CGT will bite on resale of the property but, again, could be avoided by selling the shares in the company.
It might be worth considering transferring the property out of the company to your own name now before the CGT is introduced in April next year. Transfers by companies by way of gift, but not sale, are exempt from SDLT. That might be attractive for younger buyers who are in good health and need not be concerned about the 40% IHT. For more elderly buyers the 40% IHT is likely to be the biggest concern so individual ownership is particularly unattractive. For them it seems as though ownership through a pension or another sort of trust will be the way to go.
For those purchasing UK property before the details of the new CGT and Mansion Tax legislation become clear it may be best to continue to purchase through an offshore company. If the property is worth more than £2 million it will mean paying the higher 15% rate of SDLT but there are schemes that can be used to substantially reduce that charge. Corporate ownership will give flexibility.
If the legislation turns out to be particularly taxing on this form of ownership it is relatively cheap and simple to rearrange.
A gift of the property by the company to either a QNUPS, a corporate trustee or back to the individual buyer would not attract SDLT unless the property was mortgaged. — SCMP
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