uk residential property ownership - step · • nrcgt (corporation tax rate + indexation if seller...

UK residential property ownership

Hayden Bailey, Partner

14 December 2015

© Boodle Hatfield LLP. All rights reserved.

The UK’s drive to encourage “de-enveloping”

OFFSHORE COMPANY

UK RESIDENTIAL PROPERTY


non-UK resident Typical pre-2013 structuring

SD / SDLT 0 – 5% and no SDLT on sale of shares

IHT Nil – full protection unless dom / deemed-dom

IT 20% UK withholding if let / shadow director if occupy

CGT s.13 TCGA risk reduced if UK resident / nil

ATED Didn’t exist

ATED-CGT Didn’t exist

NRCGT Didn’t exist (no Corp tax no mgmt/cntrl)

GAAR Didn’t exist

Privacy Good protection

Succession Law of domicile for shares

o/s company

UK residential


non-UK resident

o/s company

UK residential

Current and future position

SD / SDLT 12% (+3% BTL) - 15% - still no SDLT on shares

IHT 40% - no protection from Apr 2017 and new deductibility of debt rules (s.162A)

IT 20% UK withholding if let / shadow director if occupy / reduce by borrowing BEPS

CGT Less s.13 TCGA risk if UK resident (EU), otherwise nil

ATED £218,200 per year + CPI (£20m+ houses) – N.B. applies to UK companies too.

ATED-CGT 28% on gain since purchase or (if later) 1 April 2013

NRCGT 20% for gains after 5 April 2015 (and indexation)

GAAR n/a but consider debt

Privacy Less - CRS / Beneficial ownership register

Succession Law of domicile for shares (n.b. no Brussels IV )


NON-RESIDENT CAPITAL GAINS TAX (“NRCGT”)


• NRCGT (Corporation Tax rate + indexation if seller is co) on gains on disposal (including gifts) of an interest in UK resi property accruing post April 2015

• Rates depend upon entity being taxed (co, individual, trust)

• 3 computational methods (taxpayer’s choice):

• (a) Rebasing as at 5 April 2015 (automatic default);

• (b) No rebasing (use where the property has fallen in value); and

• (c) Straight line apportionment (useful where a property increases in value disproportionately after 5 April 2015)

• No relief from the charge for letting the property (c.f. ATED)

• Compliance cost: “NRCGT” form on disposal even if no tax (30 days – usual!)

• NRCGT losses only against gains of the same type (unless UK res)

• For trusts, NRCGT paid by trustees not added to stockpiled gains pool


HMRC FAQ’s 18 March 2015

Q20 I bought a UK residential property in 2001 whilst I was living abroad. I moved to the UK in December 2015 and sold the property at a gain in March 2018. Can I rebase to 5 April 2015?

• A20 No. UK residents are unaffected by the changes and will be subject to CGT in the normal way i.e. chargeable on the full gain less any reliefs due along with the CG annual exemption.


PPR reforms from 6 April 2015

• To qualify, an individual now has to be resident in the territory where the house is or meet the day count test

• Residence in the UK is determined by the Statutory Residence Test (SRT)

• Not a one-off test at sale. For every period post April 2015 that the new rules are not met PPR will be lost (subject to the final 18 months applying)

• Changes only apply from 2015/16. In determining relief for periods prior to 6 April 2015, the new rules are ignored


PPR new day count test

• The day count test will be met if the individual or their spouse spends at least 90 days in the property

• A day is treated as spent in the property if an individual:

(a) is present at the house at midnight, or

(b) (i) is present in the house for some period during the day, and

(ii) The next day has stayed overnight in the house.

• Not clear what “stayed overnight” means – difficulties of ‘midnight’

• Hard to qualify if non-res because 90+ days in UK generally = UK resident under SRT. What if exactly 90 days? (c.f. SRT more than 90 nights)


PPR reform

• If property owned for part year (e.g. year of purchase or sale) day count requirement reduced proportionately

• Where more than one property in the territory, the 90 day test can be spread across both (or all of) those properties

• Your spouse occupies the UK property - so you qualify for PPR and you may keep your non-UK resident status – consider trust claims (s.225) where spouse not beneficiary.

• Evidential difficulties around occupation (record keeping)

• Use of elections – elect at time of disposal (no time limit)


HMRC FAQ’s 18 March 2015

• Q11 I lived in the property for 20 years before leaving the UK in 2010 and had met all the conditions for PRR up to that date. Does this mean if I sell the property by 5 October 2016 there will be no CGT liability?

• A11 Yes. If you can identify a time prior to 6 April 2015 that the property qualified for PRR then final period relief will be available i.e. the last 18 months of ownership will be eligible for relief.


ANNUAL TAX ON ENVELOPED DWELLINGS (“ATED”)


ATED Changes from 1 April 2015 • 1 April 2015 each ATED band charge increased by 50% above inflation:

• Property value Annual chargeable amount 2015 to 2016

> £1m < £2m £7,000

> £2m < £5m £23,350

> £5m < £10m £54,450

> £10m < £20m £109,050

> £20m £218,200

• Starting ATED threshold lowered to £1m, to be lowered again to £500k in April 2016

• Relief if property is let but still need to report and claim relief / partial claims. Borrowing is not deductible from ATED charge.


ATED valuations

• ATED value is value at 1 April 2012, if owned at that date or, if acquired later, the valuation date is the date of purchase

• For new or altered properties, valuation is when entered on Council Tax Valuation Lists

• First 5 annual ATED returns (self assessment) use the 1 April 2012 figure. Revaluation at 1 April 2017 required and applies from 1 April 2018

• Must be an open-market valuation. Can self-assess or appoint a professional. “range” valuations not acceptable. HMRC can challenge a valuation and the company may be liable to penalties and interest

• Pre-return Banding Check (PRBC) if within 10% of a band threshold


ATED returns • ATED returns and payment must be made by 30 April from each annual period

beginning on 1 April

• If the dwelling is purchased or falls into ATED after 1 April, the ATED return and payment are due within 30 days (or 90 days if a new build)

• If property falls into new band that year then, for the 12 months after that April:

– The ATED Tax Return is due 1 October

– The tax is due 31 October

• You MUST complete a ATED return EVEN IF you fall within one of the reliefs

• Joint owners are jointly responsible for the ATED return and tax

• If you fall into a relief after making the return you can claim “interim relief”


ATED reliefs • The following reliefs can be claimed on the ATED return

– Letting to a 3rd party on a commercial basis (not occupied or available to connected persons)

– Held for charitable purposes

– Open to the public for at least 28 days per annum

– Part of a property trading business (not occupied or available to connected persons)

– For use by employees of the company where the employee does not have more than 10%

– Farmhouses occupied by farmers (or retired farmers)

– Property development business or intention to re-develop and sell


ATED Reliefs

http://blog.legal4landlords.com/wp-content/uploads/to-let-sign.jpg


ATED-CGT

• 28% rate with no indexation allowance

• Takes priority over NRCGT (which would be at 20% if company)

• UK and non-UK companies

• Reliefs against charge same as main ATED and similar to SDLT

• Valuation date at April 2012 – next valuation date April 2017

• Value threshold lowers to £500k from April 2016 = very low!

• Situations can arise where ATED-CGT, NRCGT and CGT apply!


ATED-CGT

• Does not extend to gains arising on the disposal of shares in property owning companies (must be a disposal of the actual property)

• The reliefs which apply for ATED will also apply for the extended CGT regime

• No loss relief will be available for losses below the ATED threshold e.g. a property acquired for £2.2m and sold for £1.9m will create a loss of £200,000 (not £300,000). That loss can only be deducted against gains arising on the disposal of other ATED-related disposals (care where threshold has changed)

• Where the company makes a “para 5 election” the entire gain (since 1982) can be taxed under the new rules rather than spilt


ATED-CGT

• ATED-CGT is extended to gains on “relevant high value disposals” by NNPs that satisfy:

– chargeable interest (condition A)

– “single dwelling interest” (condition B)

– within the ATED charge (condition C) and

– Consideration exceeds the ATED threshold (condition D)

• If satisfied, then CGT at 28% will apply in relation to the period since 6 April 2013 (or before if a para 5 election is made) except for any period that qualifies for relief.


STAMP DUTY LAND TAX (“SDLT”)


SDLT from 4 Dec 2014 • Individuals and trustees, the “slab” method replaced by

“measuring jug” for residential property

• Top rate of tax for mixed use property remains 4% (for purchases over £500,000, applying the “slab” method)

• Company purchaser at 15% slab (since Mar ‘12) for price above £500k (since Mar ’14) – reduces to normal rates where co is investment, development or trading business etc. but clawback if property ceases qualifying purpose within 3 years or occupation by non-qualifying individual

• Share purchase at 0.5% or nil (depending upon Co residence)

• Multiple Dwellings Relief potentially more valuable


SDLT from 4 Dec 2014

Property purchase price SDLT rate

Up to £125,000 0%

The next £125,000 (the portion from £125,001 to £250,000) 2%

The next £675,000 (the portion from £250,001 to £925,000) 5%

The next £575,000 (the portion from £925,001 to £1.5 million) 10%

The remaining amount (the portion above £1.5 million) 12%


SDLT and finance costs from 6 April 2016

• Restriction of tax relief on loan interest for residential properties (phased introduction)

• Removal of “wear and tear” allowance

• Rate of SDLT on the purchase of a buy to let property, or on the purchase of a second home costing more than £40,000 now subject to a 3% surcharge

• Proposed exemptions for purchases by companies holding 15 or more properties

• HMRC to issue a consultation document on this relief

• Company dividend changes and capital treatment changes


Relief and clawback of 15% SDLT rate

• Reliefs (similar to ATED) must be claimed on acquisition

• Reliefs will be withdrawn (in much the same way as group relief claims) if, within three years of the acquisition:

– the property is no longer used for the purpose which attracted relief at the time of acquisition or

– the property is occupied by a person connected with the owner (except where the relief claimed was that for farmhouses or buildings open to the public)


OFFSHORE COMPANY IHT TRANSPARENCY


Non-dom

o/s Trust

Occupy = Benefit

o/s company

Loan?

• Loss of ‘blocker co’ status for IHT from April 2017

• Results in usual issues of trust holding UK situs property:

• Not excluded property • Relevant property regime • Decennial and exit charge • Reservation of benefit • Pre-owned assets


REVIEW EXISTING ARRANGEMENTS


non-UK resident

IHT No PET before 6/4/17

NRCGT

6/4/15 +

Children (or trust?)

Gift before 6.4.17


Dad (non-UK resident) Daughter (UK resident)

Assume currently let

Non-UK company


De-enveloping plan before 6/4/17:

• If dad de-envelopes and then gifts property to daughter:

– 2 x NRCGT return (on liquidation/dividend and on gift)

– PET – 7 year risk and GROB / POAT risk if dad occupies

• If dad gifts shares to daughter and then de-envelope:

– No NRCGT by dad and no PET by dad (gift of excluded ppty)

– Then liquidate - 2 things: (a) she is disposing of her recently acquired overseas shares and (b) the overseas company is making a large gain

NRCGT on disposal by co – s.13 TCGA motive defence on attribution of full company gain to UK res shareholder – shadow director risk – mgmt & ctrl corp tax risk – dividend in specie dividend risk – any gain on shares since acquisition (remitted via receipt of property) - PPR going forward


Owners (non-UK resident)

Non-UK company

• Multiple overseas owners with shareholders agreement

• de-envelope and pay ATEDCGT • No CGT as non-res; no NRCGT

as ATEDCGT • No gift taking place for IHT • Jointly use going forward • NRCGT on each 1/6 in future • IHT on each 1/6 • Devolution governed by English

Will – possible conflict with dom • Co-ownership agreement


Non-res shareholder

o/s Trust

UK resident occupier

o/s company

Loan?

• Distribute shares from company to o/s beneficiary who gifts shares to UK resident who de-envelopes?

• De-envelope in the trust and retain trust debt to reduce 10 year charges – claim PPR / change bens

• Gain matched against use – wash out gain?

De-enveloping before 6/4/17: trust structures


Divided outright ownership

Retain 20%

of capital Gift 80% capital

100% rental income?

No GROB? (s.102B(3))

DOTAS??

NRCGT

Give some shares not all?


IHT for co’s holding UK residential property from April 2017: • HMRC consultation document due in 2016

• Amend trusts to exclude settlor to avoid reservation of benefit or remove company/property from trust?

• Make gifts of company shares to children or settlor-excluded trust before April 2017?

• Sell company shares just before death (i.e. no gift)?

• How will company debt be treated? Deduction rule extension?

• Consider Will planning and other IHT mitigation – co-ownership / life assurance?

• Wait for any “de-enveloping relief” next year (form of CGT hold-over?)


If sell the shares:

•No ATED CGT

•No Non-res CGT

•No UK Corporation Tax

•No SDLT for buyer

•Buyer retains IT benefits

If company sells the property:

•Non-res CGT at 20% from 6 April ‘15

Non Non-Dom / non-res sells let UK resi property


Non-Dom becomes UK res and occupies •IHT deemed-dom risk and 2017 changes

•ATED

•SDLT Clawback risk if relief lost w/in 3 years

•Shadow director risk (Dimsey and Allen cases)

•Corporation Tax risk (if mgmt & ctrl in UK)

If sell the shares:

CGT on sale of shares 28% (but RB)

s.87 if trust above

If sell the property:

•ATED CGT 28%

•Non-Res CGT 20% + indexation

•CGT s.13 attribution 28% (defence)

•No PPR (as company) UK-resident

Offshore company


Questions to ask clients:

• Does client own through a corporate envelope?

• Is there any debt within the structure?

• Has client occupied the property, or intends to in future?

• Has the property been let to an unconnected third party or will be?

• Are any connected parties UK resident who may benefit?

• If intends to sell, could you sell the shares?

• What valuations have been obtained? (2012, 2015 … 2017 etc.)


NEW PURCHASES


Non-UK resident Purchase in own name SDLT up to 12% (+3% surcharge if 2nd ppty)

IHT 40% on death - spouse exemption / IPDI trust - life assurance – lifetime gift – debt deduction rules s.162A

IT up to 45% on rental income if let / NRLS

CGT n/a (unless become UK resident)

NRCGT 28% on gains from April 2015 (consider PPR / rebasing options)

ATED n/a (no company)

ATED-CGT n/a (no company)

GAAR/DOTAS n/a (no avoidance)

Privacy none / consider nominee company /

Succession English law applies / English Will


Non-dom

o/s Trust

Loan?

UK res ?

Purchase through a trust SDLT up to 12% (+3% surcharge if 2nd ppty)

IHT IHT – relevant property regime – 10 year and exit charges at 6% / GROB / debt situs / deduction rules / s.103 / settle cash

IT 20% UK withholding on rental income if let / NRLS / POAT

CGT n/a unless UK resident beneficiary = s.87 CGT – LIFO capital payment o/s / RBU

NRCGT 28% on gains from April 2015 (consider s.225 trust election for PPR)

ATED n/a (no company)

ATED-CGT n/a (no company)

GAAR/DOTAS n/a (no avoidance)

Privacy none / consider nominee company /

Succession Terms of trust


Trust / Company purchase

SD / SDLT 12% (n.b. 3 yr clawback)-15% no SDLT on share sale

IHT 40% - no protection from Apr 2017 and new deductibility of debt rules (s.162A)

IT 20% UK withholding if let / shadow director if occupy / reduce by borrowing BEPS / mgmt & cntrl / transfer pricing issues

CGT Less s.13 TCGA risk if UK resident (EU), otherwise nil. Remittance risk on funding / s.87 issue if benefits in UK.

ATED £218,200 per year + CPI (£20m+ houses)

ATED-CGT 28% on gain since purchase or (if later) 1 April 2013

NRCGT 20% for gains after 5 April 2015

Privacy Less - CRS / Beneficial ownership register but discretionary trust some sheilding

Succession trust determines devolution

o/s Trust

UK res

o/s company


COMMERCIAL / AGRICULTURAL


Non-resident Commercial or agricultural property SD / SDLT 0 – 4% (consider MDR etc.)

IHT Nil – full protection

IT 20% UK withholding if let / mgmt & cntrl

CGT s.13 TCGA risk if UK resident, otherwise nil

ATED n/a

ATED-CGT n/a

NRCGT n/a

GAAR n/a

Privacy CRS / Beneficial ownership registers

Succession Law of domicile for shares

o/s company

Hayden Bailey, Partner

13 May 2015

uk residential property ownership - step · • nrcgt (corporation tax rate + indexation if seller...

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