Taxes on High Value Residential Properties

Out-Law Guide | 04 Apr 2013 | 2:24 pm | 5 min. read

This guide was updated in April 2016.

There are a number of tax charges that can arise on the purchase of high value residential property.  This guide summarises the tax charges that can arise, if, either, the property is purchased personally, or by a non-natural person, i.e. by a company or trust.

Stamp duty land tax charges

Different rates of Stamp Duty Land Tax (SDLT) apply depending on whether the residential property is purchased by a natural or a non-natural person. 

A non-natural person has to pay a higher rate of SDLT when it purchases UK residential property.  From 20 March 2014, a flat rate of 15% rate applies where the consideration exceeds the specified threshold of £500,000. 

Where someone purchases their only property or replaces their main residence, the rate of SDLT payable on a purchase of UK residential property is staggered up to a maximum rate of 12%.  Different rates apply to different consideration bands and only consideration falling in each band is taxed at that rate.  Prior to December 2014, SDLT was charged using a "slab" system, under which SDLT was charged at a single rate that varied depending on the consideration payable. 

If someone purchases a second (or buy-to-let) home there is a 3% up-lift to the rate of SDLT due, which applies to all properties worth more than £40,000.

This table shows the current rates of SDLT for residential property:

Property Value

SDLT rate

Additional property SDLT rate

Up to £125,000

0%

3%

£125,001 - £250,000

2%

5%

£250,001 - £925,000

5%

8%

£925,001 - £1,500,000

10%

13%

£1,500,001 or more

12%

15%

£500,001 or more owned by non-natural person

15%

 

For example, a property costing £1million (that is a person's first home) will give rise to an approximate SDLT charge of £43,750.  There is a calculator on HMRC's website that will calculate the SDLT:  HM Revenue & Customs: Land and property Stamp Duty Tax calculator

The purchase of a company owning a residential property will not give rise to an SDLT charge.  Stamp Duty (at a rate of 0.5% of the purchase price) will be payable on the purchase of the company's shares.  Consequently, purchasing the shares in a company that owns a residential property can give rise to SDLT savings, when compared to purchasing the property directly.   For more information on stamp duty see Introduction to Stamp duty  and for details of SDLT on commercial transactions see Out-law guide to Stamp Duty Land Tax.

Annual Tax on Enveloped Dwellings

From 1 April 2013, the annual tax on enveloped dwellings (ATED) has been charged on certain high value UK residential properties owned by non-natural persons.  The amount of the ATED payable depends on the value of the property (calculated either according to its value on 1 April 2012, or its subsequent purchase price).

The ATED originally only applied to residential properties valued at more than £2million and owned by non-natural persons. However, the Finance Act 2014 extended the scope of the ATED to apply to properties valued at more than £1million from 1 April 2015 and to properties valued over £500,000 from 1 April 2016.

This table illustrates the different bands:

Property value

ATED Charge

 

2013/14

2014/15

2015/16

2016/17

Less than £500,000

£0

£0

£0

£0

£500,000 - £1m

£0

£0

£0

£3,500

£1m - £2m

£0

£0

£7,000

£7,000 + CPI

£2m - £5m

£15,000

£15,400

£23,350

£23,350 + CPI

£5m - £10m

£35,000

£35,900

£54,450

£54,450 + CPI

£10m - £20m

£70,000

£71,850

£109,050

£109,050 + CPI

£20m+

£140,000

£143,750

£218,200

£218,200 + CPI

The ATED is paid through the self-assessment system, using an ATED return form.  Every year, an ATED return needs to be completed for every UK residential property that exceeds the relevant threshold (£500,000 from 1 April 2016) and is owned by a non-natural person. 

The ATED return will be due and the tax payable on 30 April each year (or, if later, within 30 days of the property being acquired). Properties will remain in the same property value category until 2017, although the charge will be index-linked.

If a property is acquired part way through an ATED tax year (running from 1 April to 31 March) the amount of the charge will be adjusted to reflect the period of ownership.  If a property, subject to the ATED is sold, a relief claim can be made in respect of the part of the charge which relates to the period after the sale.

There are reliefs so that genuine property development and rental companies are protected from the charge.

Capital Gains Tax (CGT)

Non-natural Persons

"ATED-Related" CGT Charge

From 6 April 2013, UK and non-UK resident non-natural persons will be subject to CGT at 28% in respect of gains accruing on the disposal of interests in high value UK residential property that is subject to the ATED.  UK companies will be liable to this ATED-related CGT charge in respect of such disposals, rather than corporation tax.

Unless an election is made to use the value of the property on an earlier date, only gains or losses on the property arising since 6 April 2013 are relevant when working out the charge to CGT.

Non-Residents' CGT Charge on Disposals of UK Residential Property

From 6 April 2015, non-UK corporate entities will also be subject to UK CGT on gains accruing on the sale of all UK residential property.  Any gain arising from 6 April 2015 will be taxable at 20% (to mirror the current UK corporation tax rate) unless the ATED-related CGT charge applies. 

Where a property falls within the ATED regime, the ATED-related CGT charge will take priority over the new CGT charge for non-residents. 

Natural Persons

From 6 April 2015, UK CGT will also be payable on gains arising on disposals of UK residential property by non-UK resident individuals. 

Only the gain arising from 6 April 2015 will be taxed.  Generally the value of the property as at 6 April 2015 will be the effective base cost.   Individuals may be able to benefit from principal private residence relief, but these rules have also been tightened.  The gain will be taxed at either 18% or 28% depending on the total UK source income and gains in the year of disposal. 

Inheritance Tax (IHT)

In the Summer 2015 Budget, the government announced proposals to introduce new rules to ensure that residential property held directly, or indirectly by non-UK domiciled individuals or by excluded property trusts will fall within the remit of UK IHT.  It is currently intended that these changes will be introduced from April 2017.  Although these proposals will be subject to a consultation, it is highly likely that these changes will come into force. 

Previously, a non-UK domiciled individual could avoid UK IHT by holding UK property through a trust or company.  This resulted in many non-UK domiciled individuals using offshore structures to hold UK residential property.  Given the proposed changes, potentially affected individuals will need to review their structures to calculate the potential tax charge that may arise.  There may be significant costs of de-enveloping residential property, particularly if the property is mortgaged or has increased in value since 2013.  The government is aware that de-enveloping structures could give rise to large tax charges.  They have mentioned that they may consult on this, but individuals should not assume that any concessions will be made. 

What does this mean for existing structures?

Using offshore structures was once a very tax efficient way to hold UK residential property.  However, with the recent announcement regarding potential IHT exposure, it is unlikely that these structures now hold much beneficial value.

The question of whether structures should be retained or dismantled needs to be considered on a case-by-case basis, taking into account the personal and financial circumstances of the beneficial owners as well as the tax implications.