Designed to reduce the practice of buying high value UK property for non-genuine commercial use, ATED is targeted at companies striving to envelope dwellings. Not only has the new ruling in April 2016 affected the thresholds, bringing the lower banding down to a £500,000 valuation, but SDLT and CGT are also affected.
Stamp Duty Land Tax (SDLT)
The 15% SDLT payable on properties purchased, acquired or owned by non-natural persons (companies, partnerships with corporate members, investment schemes) will now be payable on properties valued at £500,000 and above. Before March 2014 this only applied to dwellings valued at £2million or above. This new threshold applies to properties purchased on or after 20 March 2014. However, generally, if contracts were commenced prior to this date, but were completed after, the £2million threshold will still stand.
To compare, if a person purchases property for their own personal use, the SDLT is staggered up to 12% for qualifying properties, depending on the banding of the property. This is charged on properties over £125,000 and above. Second properties are charged at 3% above this rate.
ATED-related Capital Gains Tax (CGT)
ATED-related CGT is charged 28% on any profits arising from the sale of properties subject to ATED rules (although tapering relief is available for those properties just over the ATED starting threshold). In line with changes introduced to the ATED thresholds, from April 2016 the lower threshold for property valuation is also £500,000.
This charge only applies to the gain that has occurred since the property was first subject to an ATED charge (for example, if the property was acquired part way through an ATED tax year). However, any portion of profit not subject to this CGT charge may be subject to anti-avoidance legislation or the new CGT charge introduced in April 2015 for non-UK residents.
Non-residents CGT charge
Before the introduction of ATED in April 2013, non-UK companies owning UK property were not liable to pay UK tax on any profits arising from the sale of UK property. After this date, those companies that complied with the rules of ATED were subject to CGT. From 6 April 2015, UK property owned by non-UK corporate companies is subject to UK CGT on profits from the sale of these properties. The tax rate on this is 20%, unless ATED-related CGT charge applies.
What this means to offshore companies
With the recent changes in mind, there are three options available to non-residents owning high value UK property:
- Do nothing – this means the company will be subject to ATED and CGT.
- De-envelope – remove the property from company ownership and put it into a personal ownership. No ATED or CGT will be payable for non-UK residents. However, Inheritance Tax (IHT) will be payable on death at 40% of the value of the property for all estates worth more than £325,000.
- Re-structure – convert the company structure to an offshore trust, putting the property in the hands of trustees. This option ensures no ATED, CGT or IHT and presently could be the least expensive option, depending to the property value. However, the UK government could make changes to this in the future.
The main disadvantage with this option is that the trust may be subject to the ‘relevant property trust’ rule, which can see properties paying the ten-year and exit charges for IHT, which can be up to 6% of the value. This can add up to the same as ATED payments in some cases, unless the property is de-valued in some way.
Offshore pension trusts are another re-structure option, but there are limits on accessing the capital and personal use.
The best option for each individual situation depends on the value of the property and the company structure.
What to do next?
The rules relating to ATED, SDLT and ATED-related CGT are complicated at best and confusing at worst. If you are a non-UK resident company or a non-natural person owning property of value in the UK, you need to ensure you are abiding to all the rules, while devising a structure that is the most cost-effective for your company needs. If you are not complying, you will be subject to penalties. Obtaining expert advice is the first step to ensuring you are following UK tax regulations.
How Anderson, Wilde and Harris can help
As RICS registered Chartered Surveyors we conduct residential property valuations to help companies meet the requirements set out by HMRC. We can assist you with your property tax valuations, helping you to make the right tax decisions based on an expert valuation.