Annual Tax on Enveloped Dwellings (and related taxes) and Non Resident Capital Gains Tax
As many readers will already know, offshore companies owning UK residential property now have potential UK tax exposure that in practice requires the appointment of a tax agent to deal with these new tax liabilities (and their reliefs), created by ATED 1, ATED-related CGT and ATED-related SDLT. Even if for any reason an offshore company can claim relief from the ATED regime, there is now (since 6 April 2015) a new capital gains tax regime for non-UK residents (NRCGT) to consider.
In this article, we provide an introduction to the new taxation regimes applicable to offshore companies owning UK residential property.
UK taxation of ‘Enveloped’ UK residential property: an update:
The UK government have referred to the use of offshore companies to own UK residential property as “enveloping” and have devised a tax regime to discourage such enveloping. This regime may loosely be described as the “ATED” regime, which consists of 3 penal taxes:
(a) An enhanced SDLT charge of 15% when a company acquires residential property for consideration exceeding £500,000.
(b) An annual tax, or “ATED“. The amounts of ATED are set out below:
These ATED charges will be increased each year by at least the annual rate of inflation of the Consumer Prices Index (CPI). However, the taxable value bands will not be indexed or inflated, which underlines the penal intentions of this regime.
If enveloped residential property had a market value exceeding £2,000,000, on 1st April 2012 then ATED will have been payable for the ATED financial years 2013/14, 2014/15 and 2015/16, at the ATED rate applicable to the 2012 market value of the property.
The taxable value of residential property owned by a company is not determined for ATED purposes each year. The central valuation system is a 5 yearly regime based on a statutory valuation date arising every 5 years. The first statutory valuation date was 1 April 2012, so the next statutory valuation date will be 1 April 2017.
With retrospective effect from 1 April 2012, the property threshold value of the ATED charge was reduced to £1,000,000 for the ATED year beginning 1 April 2015 (so that ATED of £7,000 would have been payable by envelopes for the 2015/16 year).
From 1 April 2016 the market value threshold will be reduced yet further to bring companies owning UK residential property worth more than £500,000 but no more than £1,000,000 on 1 April 2012 within the ATED regime.
Therefore, it is important to assess the market value of enveloped residential properties on 1 April 2012 in all cases where property was enveloped by a company on the first statutory valuation date. The 2012 valuation will constitute the taxable value of the property for ATED purposes until either the next statutory revaluation period occurs, or the market value of the property on the date of its acquisition if the property is acquired by a company within a 5 year statutory period.
(c) ATED-related CGT is the third aspect of the penal regime directed against offshore corporate ownership of UK residential property.
If a company is within the ATED regime described in (b) above, it will generally have to pay ATED-related CGT on any proceeds of sale realising capital gains. The rate of ATED-related CGT is 28% and there is no annual indexation relief. However, re-basing provisions mitigate the impact of this recently introduced tax.
Long-standing envelopes can rely on the rule that companies within the ATED – related CGT regime at its inception are deemed to have acquired the residential property on 5 April 2013 at market value. If a company first came within the ATED regime on 1 April 2015 (as a result of the retrospective reduction in the ATED threshold to £1,000,000) then the company is deemed to have acquired the property for ATED-related CGT purposes on 5 April 2015, at current market value. If residential property owned by a company only comes within the ATED regime on 1 April 2016 (as a result of the retrospective reduction in the ATED threshold to £500,000) then for ATED-related CGT purposes the company will be deemed to have acquired the property on 5 April 2016 at current market value.
There are potential reliefs from these three ATED-related taxes which companies can utilise. The most commonly used relief applies where the company rents residential property or properties on commercial terms with a view to profit. This relief will not be in point if the beneficial owner of the envelope or persons related to him reside in the property. Such occupation by a person connected with the beneficial owner disapplies the relief for the relevant dwelling. But otherwise, conducting a genuine property rental business (or a property development business) is a legitimate way for an offshore company to avoid all ATED related taxes.
What other UK taxes may be payable even if my offshore company is able to claim relief from ATED?
Even if the ATED regime is not applicable to an offshore company owning UK residential property (because of statutory reliefs or because the company is a nominee or trustee) nevertheless other UK tax regimes may be applicable. Rental income arising from residential property to an ATED-relieved offshore company will be subject to basic rate income tax, and whilst it used to be a general rule that non-UK resident companies were not subject to UK CGT, capital gains tax will now be applicable to ATED – relieved offshore companies, because of a recently introduced CGT regime for non-residents (NRCGT) which will apply if an offshore company outside the scope of ATED sells or otherwise disposes of UK residential property realising gains. The new NRCGT was introduced with effect from 6 April 2015.
Non Resident Capital Gains Tax (NRCGT)
NRCGT is not a tax on all forms of UK property: it is limited to disposals of UK residential property, not within ATED. The NRCGT is applicable to non-UK resident individuals, companies and trusts.
In the case of companies, there is an exemption for diversely held companies, and widely-marketed unit trusts, but these exemptions will not generally apply to property rental offshore companies.
The rate of NRCGT is 20%
Given that NRCGT was only introduced on 6 April 2015, existing residential property in the scope of the tax can be re-based to market value on 5 April 2015 for NRCGT purposes. Indexation also applies to NRCGT going forward, so it is not a penal tax in the way that the ATED taxes have been designed to be. But NRCGT, although a more benign tax regime than ATED-related CGT, only applies if ATED-related CGT is not applicable.
Many clients are now seeking to de-envelope their residential property to avoid ATED taxes. Transfers of residential property from offshore companies to their beneficial owners will be a disposal for CGT purposes. This disposal will probably result in a capital gain for the company (unrealised) which may then be subject to CGT. De-enveloping UK residential property assets will result in loss of UK IHT sheltering for non-UK domiciled beneficial owners, but offshore companies will be likely to become transparent for UK IHT purposes from April 2017 anyway where they envelope UK residential property.
De-enveloping strategies are probably best undertaken sooner rather than later to benefit from the recent CGT re-basing of property values in 2013 (ATED related CGT) and 2015 (NRCGT).
Stamp Duty Land Tax (SDLT)
Another tax that falls to be considered is SDLT particularly in the context of de-enveloping strategies. An assignment of UK property where the transferee does not assume any obligation in connection with the transfer is free of SDLT. As long as the beneficial owner of an offshore company that is “de-enveloping” does not give payment or consideration for the property assets, the main rule is that there is no SDLT charge. However, an exception to this rule applies if the transaction involves either the release of a debt due to the transferor, or due from the transferor. In either case, the chargeable consideration for SDLT purposes is the amount of the debt.
HMRC appear to accept that if the debt is a shareholder loan then on liquidation of the company the loan also dissolves and is not chargeable consideration. Alternatively, the shareholder’s loan can be capitalised before distribution of the property.
A liquidation of a UK property owning company can therefore be considered to transfer UK property to beneficial owners as part of a de-enveloping strategy. Although liquidation will not now avoid CGT charges against the de-enveloping offshore company if there has been capital appreciation of enveloped property, such liquidation can in appropriate circumstances avoid SDLT and the statutory rebasing provisions will provide a significant measure of tax relief for the offshore company from CGT.
If you do own UK property in the name of a UK Company we would strongly suggest you seek legal advice from your UK lawyer and Tax/Financial Advice from your UK Tax Adviser/Accountant asap.