Tax Bite – Tax on Enveloped Dwellings and CGT on Non Residents

Annual Tax on Enveloped Dwellings (“ATED”)

The ATED rules impose a new annual charge where UK residential property is owned by a Non Natural Person (“NNP”). This includes companies (both UK and non-resident) as well as certain other corporate entities. In addition to the ATED charges any entity which is caught by the ATED charges are potentially within the new ATED CGT charges which impose a 28% CGT charge when the properties are disposed of.

Currently, high value property is defined as property worth more than £2 million, but reliefs apply where the property is held as part of a business (e.g. property rentals and developments). In order to claim relief from ATED (and a claim must be made!) an ATED return must be submitted to HMRC annually. The return must be submitted by 30 April and represents the period 1 April to 31 March.

The definition of high value property is now going to be extended to properties worth more than £500,000. Relief will be available for landlords and property developers but there will still be a compliance burden as annual returns will need to be submitted to claim relief. This new definition of “high value” is going to bring a lot more entities into the ATED charges and will be implemented in two stages:

  • From 1 April 2015, where a property is worth between £1 Million and £2 Million, an ATED charge of £7,000 per year will be payable. In addition, CGT on the ATED related gains will apply from this date.
  • From 1 April 2016, where a property is worth between £500,00 and £1 Million, an ATED charge of £3,500 will apply. In addition, CGT on the ATED related gains will apply from this date.

CGT on Non Residents – Impact on property developers?

HMRC announced in their Autumn Statement the extension of capital gains tax to non-residents disposing of UK residential property. The change is due to apply from April 2015, and only to gains arising from that date. The rate will be the same 28% that is applied to most UK tax payers. A special ‘tailored charge’ regime will be applied to corporate owners but the precise rate has not been announced yet. No exemptions from this charge are being considered other than for communal use properties. The “genuine businesses” that were excluded from ATED CGT (such as property letting) will not be exempt from the new CGT charge.

Due to the wide reaching nature of the new charge we have considered whether trading profits of an offshore property developer will be brought into the new charge. A company or individual carrying on property developing has always been treated as trading and any profits are usually assessed to income tax rather than capital gains tax (although in certain circumstances the income tax liability can be decreased by using a tax treaty).

Helpfully, the consultation document clearly states that “where residential property is developed as part of a business, normal considerations will first be given as to whether any gains should be taxed to income or profit, rather than CGT”. It has yet to be seen whether HMRC will seek to use the new CGT rules where treaty reliefs are sought – but it would be quite radical for them to seek to subject trading profits to capital gains tax.

 

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