02 July 2014

Chancellor George Osborne is set to extend his tax raid on property owners over the next two years, bringing more modest tax payers within his sights. We look at the extension of these tax charges over the coming years.

Pushing the envelope

April 2013 saw a new term enter the lexicon: the “enveloped dwelling”. An enveloped dwelling is a residential property owned by a company (or equivalent).

Two new tax charges were introduced to counter the perceived use of such “envelopes”. Initially these taxes just caught properties worth over £2 million, mainly in the South East. But the taxes are now being extended.

One of the new taxes will soon apply to properties worth more than £500,000 held in envelopes: barely twice the UK’s average house-price. The other will apply to all properties whether or not enveloped.

The Taxes: the current regime

Since 1 April 2013, owners of enveloped dwellings pay an 'Annual Tax on Enveloped Dwellings' or 'ATED', where the property had a value of £2 million or more on 1 April 2012.

Corporate bodies are usually outside the Capital Gains Tax ('CGT') net, instead paying corporation tax at a lower rate. The changes also extended CGT to disposals of properties subject to ATED, meaning a higher rate of tax for structures when a property is sold.

A higher 15 per cent rate of Stamp Duty Land Tax ('SDLT') also applies when residential properties are bought by companies.

Widening the net

In the 2014 Budget, the Chancellor announced that ATED is to be extended over the next two years to apply to more modest enveloped dwellings. Two new bands will be created for ATED:

  • Properties valued at between £1 million and £2 million be caught from 1 April 2015, with an annual charge of £7,000
  • Properties valued at between £500,000 and £1 million will be caught from 1 April 2016, with an annual charge of £3,500

The annual charge for each of these new bands will increase in line with the rate of inflation, but the bands will remain at the same level.

The ATED-related CGT charge will also be extended to include these lower valued properties, applying from 6 April in 2015 and 2016 respectively. However, CGT will only apply to gains on the properties that have accrued on or after those dates.

Finally, from 20 March 2014 onwards the 15 per cent SDLT rate will also be extended to properties worth more than £500,000.

Non-resident owners

Currently non-residents do not pay CGT on disposals of UK property. In March, the government  published its consultation on how it will implement plans to change this, making non-residents pay CGT on disposals in the same was as their resident counterparts but only in relation to UK residential property.  

The new CGT charge will come into effect from April 2015 but only on gains from that date. All residential property will be caught, whether let out or occupied by the non-resident, and it doesn't matter if the owner is an individual, company, trust or partnership.

Details of how this will interact with the ATED-related CGT charge have yet to be set out, but it is clear that there will be different rules, exemptions and reliefs across the two regimes.  

Beating the ATED charges – farmers and property businesses

Companies have become more commonplace in farming in recent years. Where these companies own land which includes the farmhouse, they may come within the ATED charge.

However, relief is available. If a company owns a farmhouse that is occupied by either a farmworker or a retired farmworker it will be relieved from the ATED charge.  

There are broadly two conditions; first the farmhouse must form part of land occupied for the purposes of a farming trade, and crucially, the company owning the house must also carry on the farming business; second, the farmworker must work an average of 20 hours a week in the business, either in a management role or out on the tractor.

There are also reliefs available for property letting businesses, property development businesses and property dealers.

Even if a relief is available a tax return must be made claiming the relief, which may be an unwelcome burden for businesses.

Options for the future: to restructure or pay up?

As these extensions have been announced well ahead of their introduction, there is time for those who may be affected to consider restructuring to take themselves out of the charging regime.

However, it is important to seek advice before 'de-enveloping' regarding available reliefs and the impact of removing properties from their current structures. Holding property at company level may offer IHT protection, particularly for overseas individuals, who may feel that the relatively small annual charge (£7,000 on properties worth between £1 million and £2 million) compares favourably to any potential IHT exposure holding the property directly. There are also potential benefits for inheritance tax reliefs which need to be considered.

Key contact

Headshot John Barnett

John Barnett Partner

  • Head of Partnerships
  • Private Client Services
  • Tax

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