The word “tax” often strikes fear into the hearts of entrepreneurs – paying too much, paying too little, tax planning, tax avoidance, tax efficiency – it is a minefield.

And this year as well as the increased rates of Stamp Duty Land Tax (SDLT) announced in the Budget, two other major changes were announced: a proposed annual charge (sometimes referred to as a "mansion tax") and, for the first time in the history of UK Capital Gains Tax (CGT), the extension of the current CGT regime to include certain non-UK residents.

Both of these are currently the subject of a government consultation with draft legislation due to be published in the Autumn. Helen Reid, solicitor in the tax team at Farrer & Co, provides an update on how these changes may affect you.

1. The changes

(i) SDLT

With effect from 21 March 2012 SDLT rates for residential purchases are:

  • 7% on properties worth more than £2m.
  • 15% on properties worth more than £2m where, broadly, the acquiring party is a company (whether UK or non-UK).

(ii) Annual charge
Who will this charge apply to?

Broadly, the annual charge will apply to companies (including both UK and non-UK companies).

When will the first charge apply?

The first annual charge will arise on 1 April 2013.

How will the charge be calculated?

The charge is to be calculated on the market value of the property in question.

Who decides on the market value of the property?

The annual charge will be self-assessed. It is likely that the safest way to go about this will be for property owners to commission a professional valuation report. However, HM Revenue and Customs has suggested it may offer a valuation checking service. The property will need to be re-valued every five years.

What are the rates?

The rates for the first year of charge range from £15,000 to £140,000 depending on the value of the property:

£2m – £5m        £15,000
£5m – £10m      £35,000
£10m – £20m    £70,000
£20m+             £140,000

The rates will be increased each year in line with inflation.

(iii) CGT
What has changed?

Under existing rules CGT is generally only payable by UK residents. What is quite revolutionary is that the extended regime (due to take effect from April 2013) will ensure that, where non-resident companies (and possibly trusts) dispose of a UK residential property for more than £2m, CGT will be charged on any gain realised.

Who will the new CGT regime apply to?

The extended CGT regime will apply to companies (whether UK or non-UK) but may also include trusts and other entities. The inclusion of these additional categories is, however, the subject of consultation.

If a disposal is made after the new regime is introduced in April 2013, will CGT be payable by non-residents only in respect of any uplift in value from that date?

No. On disposal CGT will be payable in respect of the total gain accrued during the period of ownership of the property.

Will the new CGT regime only apply to the disposal of residential property?

No. It will also apply to any gains that accrue on the disposal of assets that represent UK residential property, including shares in a company where more than 50% of the value of the asset derives from UK residential property.

2. Action plan

(i) Timing

  • Companies holding high value residential property will be exposed to the annual charge from April 2013.
  • Offshore companies and possibly offshore trusts will be exposed to a CGT charge on disposal of high value residential property from April 2013.

(ii) What should you do (or not do) now?
  • Anyone looking to buy high value UK residential property in the near future may well be best advised to keep things simple and acquire the property personally.
  • Historically, one of the main reasons for holding property through offshore companies has been for inheritance tax planning reasons. Individuals who are potentially affected by these changes should consider whether the annual charge might be preferable to an inheritance tax charge on death.
  • Generally, decisions to restructure should be delayed until publication of draft legislation on the annual charge and the extended CGT regime in Autumn 2013.

These changes are of huge significance and are inevitably going to have a major impact on the way in which high value UK residential property is held. Clearly, ownership will need to be looked at on a case by case basis in order to find the most appropriate property owning structure for each individual's or family's particular circumstances.

Helen Reid is a solicitor in the tax team at law firm Farrer & Co