It is important for any individual or company to consider the tax implications in advance of the acquisition or disposal of residential property. The law in this area has been subject to recent changes, some of the most significant of which are discussed below.
STAMP DUTY LAND TAX CHANGES
Residential property acquired on or after 4 December 2014 is subject to new rates of Stamp Duty Land Tax (SDLT). Under the new rules, the former “slab” system, whereby SDLT was charged as a single percentage according to the threshold into which the property fell, has been replaced with a progressive system. SDLT is now charged at different percentages in accordance with the portion of the property value which falls into each threshold:
PORTION OF PROPERTY VALUE RATE OF SDLT APPLIED MAXIMUM LIABILITY
The first £125,000 0% £0
£125,001 – £250,000 2% Up to £2,500
£250,001 – £925,000 5% Up to £33,750
£925,001 – £1,500,000 10% Up to £57,500
£1.5m + 12% Adds £120 per £1,000
By way of an example, the SDLT charge for a residential property purchased for £500,000 will be:
£125,000 at 0% = £0
£125,000 at 2% = £2,500
£250,000 at 5% = £12,500
Total consideration: £500,000 Total SDLT: £15,000
As a result of these changes, purchasers of residential property will benefit from a lower SDLT charge when the price paid for the property is either up to £937,000 or between £1,000,000 and £1,125,000. Total consideration for residential property falling outside of these brackets will incur a greater charge to SDLT than would have been the case under the old rules.
ANNUAL TAX ON ENVELOPED DWELLINGS (ATED)
ATED applies to residential property valued at over £2 million (£1 million with effect from 1 April 2015 and £500,000 with effect from 1 April 2016) which is held by a “non-natural person” namely a company, a partnership with a corporate member or collective investment scheme. Such properties are subject to an annual charge unless the non-natural person qualifies for an exemption or a relief. The Government increased the ATED charge by in excess of 50% from 1 April 2015. The following annual charges therefore apply:
PROPERTY VALUE ANNUAL CHARGE IN 2015-2016 ANNUAL CHARGE IN 2014-2015
£1m-£2m £7,000 N/A
£2m-£5m £23,350 £15,400
£5m-£10m £54,450 £35,900
£10m-£20m £109,050 £71,850
£20m+ £218,200 £143,750
There are a number of possible options available for a non-natural person which owns residential property that is subject to ATED to ‘de-envelope’ and therefore fall out of the charge which we would be delighted to discuss with you.
ATED CAPITAL GAINS TAX
It is worth noting that the tax position changes for a company which makes a gain on selling a property subject to ATED. A company is ordinarily charged Corporation Tax on gains which arise. Where, however, a gain is made on the disposal of property subject to ATED then the tax is shifted to Capital Gains Tax (CGT) which results in a higher tax liability.
CAPITAL GAINS TAX FOR NON-UK RESIDENTS
CGT will apply to gains made from 5 April 2015 onwards by non-residents disposing of UK residential property. Generally non-UK residents are not subject to CGT on the disposal of any other assets in the UK. Whilst it is possible for a non-UK resident to avoid the charge by treating the property as their principal dwelling it is necessary to occupy the property for at least 90 days per annum which of itself creates other taxation issues, in particular in relation to residence. Should a property throughout its ownership be subject to ATED CGT it will not also be liable to this charge.
CAPITAL GAINS TAX: PRINCIPAL PRIVATE RESIDENCE RELIEF
A change which affects those who own and sell a second home is that the final period of exemption for Principal Private Residence Relief (PPR) was reduced from 36 to 18 months for disposals made on or after 6 April 2014. This was designed to reduce the incentive for owners to “flip” (switch an election for PPR from one property to another) shortly before sale.
The taxation affecting residential property should not be overlooked and in many cases is not straightforward. The law has been subject to recent changes and the outlook is one of further change. It is not possible to address all of the intricacies of the taxes which apply in a note of this length. Therefore if you would like to discuss any issues raised, or the area of taxation in general, further please contact Richard Monkcom or Matthew McCormick.This note does not constitute legal advice but is intended as general guidance only. It is based on the law in force as at June 2015.