Location taxation

  • Author : Lucia Perchard
  • Date : April 2013
ABOUT THE AUTHOR: Lucia Perchard is Vice President at Barclays Wealth Advisory in Jersey

The 2012 UK budget introduced a 15 per cent stamp duty land tax (SDLT) rate for the acquisition of UK residential properties worth more than GBP2 million by a ‘non-natural’ person (essentially companies). In addition, the Chancellor announced proposals for an annual residential property tax (ARPT) to be levied on residential properties worth more than GBP2 million owned by non-UK-resident non-natural persons, and an extension of the capital gains tax (CGT) regime for such properties sold by non-UK-resident non-natural persons. The draft CGT rules were published at the end of January and they have extended the new CGT rules to both UK and non-UK non-natural persons.

It is now essential that trustees and company boards, together with tax advisors, settlors, beneficiaries and beneficial owners, review wealth-management structures that hold UK residential property to identify and understand the impact the new legislation will have. Structures will need to be carefully examined to ensure that they remain fit for purpose in the new taxation environment while continuing to preserve and enhance the value of the assets held.

ARPT

Although the threshold for properties subject to the new tax is GBP2 million, structures holding properties close to that level should also be reviewed if they have potential to increase in value and become subject to the ARPT.

At a glance, the figures show that the ARPT charge will depend on the value of the property as at April 2013. For property valued at between GBP2 million and GBP5 million, a GBP15,000 charge will apply. Above that, the rate increases in stages to a maximum of GBP140,000, for properties valued at GBP20 million or over. It is also worth bearing in mind that the charges are index-linked and will increase in line with the consumer price index. Also, a return will need to be completed, though this has yet to be issued. The thresholds are fixed, however, so fiscal drag will apply, bringing more properties into the ARPT charge over time.

There are notable reliefs, in particular for commercial property, property development and income property rental businesses. HMRC has been clear that the reliefs will apply only where the conditions they outline are met. For example, where trustees rent a property to a relative of the settlor, even if a distant relative and at a commercial rent, the relief will not be available, so only those clearly rented to a third party would apply.

These exemptions are positive news for the Channel Islands, as a considerable amount of property is held in structures in the islands for this purpose, and the relief means that these can continue to be held in their current form without adverse tax consequences.

Weighing up the options

For property that is held for the enjoyment of non-resident and non-domiciled beneficiaries of a trust, the position requires more attention, and there may be several ways to ensure that individuals can continue to use the property as they had historically. Typically, a property in this scenario is held in an offshore company that is owned by an overlying offshore trust. This ensures that the asset can be enjoyed and inherited by multiple beneficiaries, caught as it is within the terms of the trust.

A property held in this manner is now likely to be subject to the ARPT and indeed CGT of 28 per cent on sale for any increase in value after April 2013. Trustees therefore have a fiduciary obligation to consider the way these assets are held in light of this, as the consequences may outweigh the benefits of the structure in its current form. This will depend on several factors: what the main purpose or use of the asset is, the reason the structure was initially created and the current circumstances of the family.

In these circumstances there are three main options. First, leave the structure as it is and pay the ARPT and CGT. Second, seek advice to remove the company from the structure and hold the property directly within the trust. Finally, again with advice, look to distribute the property from the structure to be held by beneficiaries in their personal names.

All three courses of action have advantages and disadvantages, and advisors will need to weigh up, with trustees and the settlor or beneficiaries, which option suits their needs best, based on their individual circumstances.

Transferring the property into a personal name might seem to be the simplest solution, but there are drawbacks to this approach. Most importantly, the property cannot be held for the benefit of multiple persons, and succession planning is generally the primary driver for using a wealth-management structure, to ensure that assets are inherited and distributed as planned, without dispute. Furthermore, the property will then fall into the owner’s estate for inheritance tax purposes on their demise.

In addition, many clients, for various reasons, value confidentiality. Holding the property through a company enables the owner to take a step back, while owning the property directly requires their name to be entered on permanent registers.

“Review any offshore structure holding property in the UK”

Removing the company from the structure is another option for trustees, and again brings benefits and disadvantages over maintaining the status quo. While the ARPT won’t be levied against the property, as the trust is classed as a natural person, the property may create other liabilities, such as CGT and inheritance tax charges. This may be preferable for a trustee where the settlor or beneficiaries require and benefit from the protection and succession planning the structure provides. What will need to be carefully considered is that the status of their property can change with use, so if, for whatever reason, they require personal use of the property for more than six weeks per year, there could be consequences for their tax situation. Any changes need to be carefully considered, and again advice should be sought.

Practical implications

Whatever their decision, the key process needed is to review the impact of the new legislation on structures and work with beneficiaries to ensure that the structures are meeting their current and future needs from a practical point of view.

If that means paying the new charge, then trustees must be prepared to work through the practical implications. First, and perhaps most prosaically, there is the issue of the value of a property. With the rate of tax set in bands, properties falling just above the break point are subject to a much higher rate than those immediately below. There is expected to be considerable scrutiny on the value of property, and while owners are being asked to submit their own valuations, the UK government is offering a free valuation service for properties close to the threshold and where HMRC may dispute the owner’s valuation. It is for the trustee to consider whether they obtain an independent valuation or use HMRC’s services.

Finally, the implications of paying the annual charge must be considered, as it is a substantial amount. At this time of low interest rates, many have used the often superior returns on property as a key component of a portfolio of assets. This can mean some clients are asset rich but cash poor, and freeing the funds to pay the charge may prove challenging. This is where other products and services should be brought in, such as lending or insurance products to better diversify their assets and provide the flexibility required.

Positive outlook

The new legislation being brought into play by the Finance Act 2013 will serve as a trigger for review of any offshore structure currently holding property in the UK. Some of these structures may have existed for a considerable time, as property is an asset that tends to be held for longer periods. It may have been some time since the structure was fully reviewed with a client to ensure that it is still fit for purpose – and now is the perfect time to undertake such a review.

For the Channel Islands, the outlook is positive. Property rental businesses and property developers are subject to reliefs, reflecting the importance of this sector to the UK property market. This is critical for the islands, as it represents a significant amount of business for the financial services sector. While properties held for personal use may now be subject to additional UK charges, remember that many are held this way for practical reasons such as succession planning and familial relationship management. Given the expertise present in the islands, the wealth-management sector here is still well placed to assist clients in establishing the best way to manage their property assets to ensure that they can continue to use them in the way they wish.


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