A series of new property taxes have been included in the new Draft Finance Bill announced today; there is a new annual levy for non doms with homes worth over ?2m, and an extension to capital gains tax, charged at 28%, for non-residential non natural persons disposing of interests in UK residential property valued at over ?2m.
The annual levy will be charged at the following rate:
?15,000- Between ?2m and ?5m
?35,000- Between ?5m and ?10m
?70,000- Between ?10m and ?20m
?140,000 - Greater than ?20m
The annual levy, which will now be called the Annual Residential Property Tax (ARPT) for corporate vehicles, will continue as proposed. However, exemptions will once again apply for bona fide businesses so that APRT and SDLT (stamp duty land tax) measures go hand in hand. The amounts payable come into effect on the 1st April 2013 and are as follows. In 2013 only, it will be payable by 31st October, thereafter on or before 30th April.
The ARPT will have the greatest impact in prime central London where 60% of properties about ?2m are located, according to asset manager London Central Portfolio (LCP).
Amendments to the 2013 Finance Bill will ensure that foreign buyers of luxury residential property pay their fair share of tax, while safeguarding genuine business investment in residential property.
The Chancellor used March's Budget to announce he intended to close an alleged ?1bn stamp duty loophole, where some super-rich foreigners avoided paying the levy by putting expensive homes in offshore companies.
The British Property Federation raised concerns at the time that the announced measures could be applied indiscriminately across the UK market, with potentially disastrous consequences for commercial investment in residential property.
The changes also ensure capital gains tax and an annual charge catch foreign buyers of luxury residential property, while not impinging on genuine business investment in UK residential property.
Property Industry Response:
Liz Peace, chief executive of the British Property Federation, said: "Foreign buyers of luxury residential property for their own enjoyment were always the intended target of the stamp duty changes; it was never designed to deliberately clobber commercial investment in UK housing.
"The devil will be in the detail, but it appears Ministers have listened and sensibly decided to make technical changes that ensure the scope of the measure is not wider than it needs to be.
"It is, however, unfortunate the confusion has led to an investment hiatus due to the uncertainty. Because of the legislative procedure businesses looking to invest today will have to wait until next summer, or pay the additional 8%."
Caroline Takla, managing partner of The Collection LLP, a boutique London property buying consultancy, commented: "Today's draft Finance Bill is expected in its content and in the mid to long term is unlikely to have much of an impact on the London property market. Indeed, the market has already begun to adapt in response to the budget in March this year with more property being bought in individual names or off shore Trusts, which are exempt from these changes. With anonymity rather than tax avoidance, being the main driver for those who have opted for buying off shore.
"However, in the short term, we anticipate one very likely outcome to be more property valued over or close to ?2,000,000 coming to the market, as those owning property using off shore structures, decide that selling maybe the most sensible option, rather than opting to restructure the ownership in order to avoid annual charges and capital gains tax.
"Our view is that this could be positive news for buyers, who for the first time since 2009 will have real choice, particularly in the first three months of 2013 before the end of the tax year. According to recent research, pricing has risen a staggering 52% in Prime Central London since the bottom of the market in 2009 and we believe that sellers will have to adjust their expectations in order to achieve a sale."
Naomi Heaton, CEO of London Central Portfolio Ltd, fund and asset managers, specialising in prime central London, remarked: "The 15% SDLT and new ARPT may be a small price to pay for owner occupiers purchasing through a corporate vehicle, in relation to the benefit of owning a property in London, IHT savings and personal privacy. This levy is likely to be accepted as part of the investment cost, in the same way as a series of SDLT rises seen over the years have.
"With no ?new' property taxes announced during the Autumn Statement and the carve outs from the Finance Bill, the Government have clearly recognised that their previous blanket legislation not only failed to register any increased taxes, but failed to recognise the knock-on effect for the UK economy. They should be applauded for this considered decision and the recognition of the genuinely commercial contribution of residential investment and the private rented sector. Hopefully, they have learned from their mistakes, and will not apply any more knee-jerk or ill thought-out measures, which may be populist but not prudent, without prior consultation and thorough research."
Sean Randall, real estate tax director at Deloitte, responded: "The fact that the government has decided to press ahead with this new tax is no surprise. They were committed to the concept from the beginning. It is designed to deter high-value residential properties being ?enveloped' within a company so as to prevent an opportunity for stamp duty land tax (SDLT) avoidance on future sales. It is also designed to encourage individuals to ?de-envelope' such property from existing companies.
"What's certain is that trust companies, lawyers and tax advisers operating in this space will all be very busy in the run up to April advising their clients which structure is the most appropriate for them taking into account all taxes: SDLT, inheritance tax, capital gains tax and ARPT."
Randall added: "The Government has listened to industry representations on ARPT and its cousin, the super rate of 15%, which acts as a further disincentive to enveloping, by ensuring they only apply, as intended, to individual owner-occupiers. A large number of exclusions from the super rate will be introduced for various businesses, aligning it to the scope of ARPT. Controversially, however, there is no indication, as yet, that the exclusions will apply before the summer of next year. Consequently, property companies, pension funds, landed estates and new developers appear likely to continue to have to pay SDLT at the super rate despite no tax avoidance. This appears unfair and I hope the Government recognise this by back-dating the exclusions from March this year."
Peter Mackie, managing partner at independent buying agents Property Vision, commented: "As a result of the increased SDLT and the annual property tax announced in the Budget earlier this year, we have already seen some signs of international demand decreasing, particularly from nationalities unwilling own a property overseas unless it is through a company. The ambiguity of the annual tax caused a number of buyers at the top-end to put their property purchase on hold until further details were announced.
"The legislation announced in the Finance Bill today, will reassure a number of prime buyers who have been hesitant to commit to a sale. Although it will be an added cost for buyers purchasing through a corporate structure, it is unlikely to discourage buyers at the top-end who still view London as a ?safe haven'. However there will be more supply as people unravel structures wwhich they have held for a long time.
"One of the concerns as a result of increasing international investment, has been the impact of ?black out London' on some areas of the Capital where homeowners may only use their property for a few days a year leaving it empty for the remaining time. The announcement in the Finance Bill that rental businesses will be exempt from the annual property charge should encourage some homeowners to rent out their property. This could result in these areas benefitting from a greater number of residents using local businesses and services but we don't believe that will have an effect on rental prices in Prime Central London.
Ed Mead, Director at Douglas & Gordon, said: "It seems CGT will accrue on gains post April 2013 so those seeking to go for a NNP property ownership and pay the enhanced SDLY and annual Levy whilst thinking they'd rather take the capital gain must think again. For that reason all this simply distils down to who is and isn't exempt, if there's a suitable onshore vehicle that's exempt from paying the Levies that satisfies anonymity requirements then perhaps that will be the only loophole left for those seeking one.
"We've seen purchases for those not buying in the own name down c. 80% since the Budget in March so it'll be interesting to see if that blockage releases or whether we'll continue to see detrimental decline. We'll have to wait for Q3 2013 to find out via the land registry."
Richard Barber, partner at Prime Central London estate agency, W.A. Ellis, commented: "Landlords will be breathing a sigh of relief that the introduction of the CGT liability for properties above ?2m owned by 'non-natural persons' is applicable from April 2013 and not retrospective. Since the March 2012 Budget, the main factor fuelling some of our clients desire to put their properties on the sales market was that they faced a CGT liability from the date of purchase, which for those who've owned property for 15-20 years, would have been very significant.
"The annual residential property taxes are not too draconian; however, they will affect rental yields by as much as 0.75%."
Peter Wetherell, director of Wetherell, estate agency in Mayfair, said: "Since revisions to the corporate ownership of property were announced but not outlined in detail this year, many prospective buyers of prime central London properties have been deterred by the uncertainty surrounding costs of ownership, which cast a long shadow over the market. This was particularly evident in Mayfair, where a high proportion buyers purchase properties through corporate structures. This is however not to be confused with stamp duty which 97% of purchasers paid.
"The details announced today, while not overly encouraging to corporate owners of high value properties, at least provides guidance on what the government is planning. This may help unlock some of the buyers who have been on hold. The government is quite plainly indicating that private ownership of properties over ?2m with a 7% stamp duty levy is the preferred route for overseas buyers, but this also comes with knock on implications regarding capital gains and inheritance."
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