The Taxation of High Value UK Residential Property – A Guide to Proposed Changes

You may have read in the press about the UK Government’s proposals to change the way that high value UK residential property is taxed. So this seems like a good time to offer a short guide to the proposals and explain the current situation.

The current situation:

In May 2012 the UK Government published a consultation document called ‘Ensuring the fair taxation of residential property transactions’. However, referring to these proposals at the recent Conservative Party Conference, the Chancellor George Osborne, recently announced he would not introduce a new tax on homes. We await a formal response from the Government soon.

The Government’s objectives:

The Government is seeking to deter tax avoidance and ensure that owners of high value residential properties pay their share of tax. The proposals therefore aim to encourage owners of high value property who have put this property into ‘envelopes’ such as companies, to take them out and pay their share of tax.

If property owners wish to continue holding property within an ‘envelope’ environment, two measures have been proposed.

Annual charge:

This would apply to certain non-natural persons if the interest is valued at over £2m on a particular valuation date. An annual charge would be payable, according to the value of the property, which would increase in line with the consumer price index.

This would be:

Property valued at £2m – £5m £15,000 charge
Property valued at £5m – £10m £35,000 charge
Property valued at £10m – £20m £70,000 charge
Property valued at £20m+ £140,000 charge

Exclusions:

If properties comprise several self-contained dwellings, the £2m threshold would apply to each individual apartment.

Extension of Capital Gains Tax (CGT)

It is proposed that CGT will apply to gains on the disposal of UK residential property by non-resident, non-natural persons. This is to align the tax treatment on gains on such disposals by non-residents to that of UK residents.

However, it will only apply when the value of the consideration on disposal is more than £2m. The rules will extend to disposals of an interest in a company where more than 50% of the company’s assets are UK residential property. CGT will apply to the total gain accrued during the period of ownership, not just the gains accrued after the implementation of the new measures. These could mean a considerable CGT charge if a property acquired many years ago is sold for a high price after April 2013.

So far, the Government has not announced what rate of CGT will apply. Investors should also note that, if a property is ‘de-enveloped’, it is likely to be brought into the scope of inheritance tax.

So what do we at Benham and Reeves Residential Lettings make of the new proposals?

These proposals have not been clearly explained by the UK Government and this, unfortunately, has led to widespread misunderstanding as to their true extent.

However, we welcome the Chancellor’s comments suggesting there will not be a ‘mansion tax’. And, given the strength of the London residential property market, we believe that any changes that are made will not negatively affect the market. London property remains a safe haven for investors in an economically and politically volatile world. Add to this the strength of rental demand in London and we believe that London property remains a sound, long term investment for individuals from around the world.

 

Blog Image Courtesy of Images of Money via Creative Commons/Flickr
avatar Name: Vidhur Mehra
About: Finance Director at Benham and Reeves Residential Lettings.

Advising clients on new investments in London and Dubai.
Posts by Vidhur Mehra (1)

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