The new annual residential property tax (ARPT) is one of several measures, announced earlier this year, aimed at ensuring people who purchase high value residential properties in the name of a company, partnership or other 'non-natural person' pay their "fair share" of tax. Dwellings purchased as part of a genuine property rental business, held for charitable purposes or run as a commercial business will be entitled to claim a relief from ARPT on an annual basis.
The Government will also bring non-resident, non-natural persons within the scope of capital gains tax (CGT) where a residential property is disposed of for more than £2m. It will consult on extending the regime to disposals of high value residential properties by resident non-natural persons "for consistency". Draft legislation to implement the CGT change will be published in January, while the annual charge will be included in next year's Finance Bill.
Consulting on the proposals over the summer, the Government said that the changes were intended to discourage the use of 'enveloping' properties. This is where a corporate package is used to 'wrap up' a residential property intended to be used as a dwelling as a way of avoiding a stamp duty land tax (SDLT) charge.
"The Government's aim was to target ARPT at those circumstances where tax avoidance may be a significant factor whilst minimising the wider impact on genuine businesses," it said in its response (44-page / 321KB PDF) to the consultation. "It was recognised that for genuine businesses holding residential property in an envelope is likely to be the default (and indeed only) option, supporting good business practice and limiting liability."
It said that its proposals sought to balance the needs of businesses with ensuring that property owners paid "their fair share" of tax.
ARPT will apply to companies, partnerships with at least one company member and collective investment schemes, including unit trusts, that own residential dwellings valued at over £2m on or after 1 April 2013. The tax will be payable at different rates according to whether the property is valued at more than £2m, £5m, £10m or £20m, and will be proportionately reduced if the property is only owned for part of a tax year. Payments will generally be due on 30 April each year; however, for the first year of the tax payment will be due by 31 October.
A range of companies and partnerships will be exempt from ARPT where they can show that a high value residential property is being held for commercial or charitable purposes. The same taxpayers will also be entitled to claim relief on the 15% SDLT rate for high value residential properties purchased by non-natural persons, introduced following the 2012 Budget. The Finance Bill will also extend the relief to all property development businesses, whether or not these have been operating for a minimum of two years as is currently the case. However, the Government will be entitled to 'claw back' tax if the property does not continue to satisfy the qualifying conditions for a further three years.
According to research by the Financial Times, the higher SDLT rates introduced following the Budget have "all but wiped out" the practice of using corporate 'wrappers' to avoid tax charges when purchasing property. The newspaper said that there had been an 80% drop in the number of properties purchased through corporate vehicles since March. The Budget also raised SDLT on residential properties valued at over £2m bought by individuals, to 7%.
CGT will be payable by non-natural persons that dispose of their interest in high value residential properties in the UK on or after 6 April next year. Broadly, this will be payable if the taxpayer was liable to pay ARPT on the property in question.
Changes to the residence tests, as announced in the 2011 Budget and consulted on last year, will also be introduced. This will see the concept of 'ordinary residence' abolished as far as possible for tax purposes, and there will be a new statutory test of tax residence. The new test will apply for the purposes of income tax, CGT and, so far as the residence of individuals is relevant to them, inheritance tax and corporation tax. It will not apply to national insurance contributions.
The new test is mostly unaltered from that consulted on in the summer, and will come into force from 6 April. The Government has said that the "vast majority" of individuals would not be affected by the introduction of the test. It will be split into three parts, with provisions to determine whether an individual is automatically resident in the UK or overseas. The third part, known as the "sufficient ties" test, will determine the residency position if an individual does not fulfil the criteria to meet either of the automatic tests.