Acting for international clients acquiring assets in the UK
While the weather is often criticised, the comparative stability of the United Kingdom's political and economic climate has, historically, not deterred international clients from looking to the UK as an attractive home for investment and for the purchase of residential property as a base for their families on visits to this country, as well as for the education of their children.
Over the last few years, the UK's relatively benign tax regime governing the acquisition and disposal of such assets has seen the level of activity in the trading of high value residential properties by clients who may be outside the UK grow dramatically. One consequence of this is a consistent rise in the value of high value residential property in London, while values in other areas of England, as well as in other parts of the world, have stagnated if not fallen over the last 15 years.
In 2012, however, the UK Government launched an attack on those who may have taken advantage of the relatively attractive tax rates applicable to the purchase and ownership of higher value residential property in the UK, putting investment and growth at risk. The focus of the attack is "non-natural persons", which includes companies (both UK and offshore), partnerships with at least one corporate partner, and collective investment schemes. Trustees are not included in the definition.
New taxes on high value residential properties
The implications in practice are three-fold. The stamp duty land tax ("SDLT") payable on a £5 million residential property purchase has risen to £350,000 for an individual and £750,000 for a company. Enough incentive, perhaps, not only to make one reconsider purchasing a home in the UK, but also perhaps for the foreign national to consider taking the family away and looking elsewhere for a home.
It has always been the case that SDLT is payable whether the buyer of UK real estate is an individual or a company (and whether foreign or not) but the savings can come when the property is to be sold: if a company owning the property has no other asset then there is of course the option to sell the company rather than simply the property itself. By doing so, if the company is UK registered then stamp duty is payable on the sale price at the lower corporate rate of 0.5%, while there is no stamp duty payable at all on the transfer of shares in an offshore company.
But the possible increase in the SDLT bill when buying a higher value property is not the only change that the foreign buyer has to consider. The Government has also introduced an annual tax on UK residential property worth over £2 million that is owned by non-natural persons and a new charge on gains realised on the sale of such properties. The annual tax has effect from 1 April 2013 and, depending on the value of the property, might range from £15,000 (on properties valued between £2m and £5m) to £140,000 (on properties valued over £20m). The new capital gains tax charge is payable at 28% on gains accruing on the property after 5 April 2013. Previously, on the sale of a property, UK companies paid corporation tax (which applied at a rate less than 28%) on any gains, and non-UK companies did not have to pay UK tax at all.
The property market seems, perhaps surprisingly, largely to be absorbing the impact of these new taxes. But, if the taxes have not completely discouraged international clients from investing in UK residential property, the possible introduction of a "mansion tax" – a further attempt by UK politicians to tax high value properties annually – certainly may.
A motive of anti-avoidance
Contrary to appearances, however, all this is not meant actively to discourage international clients from looking to the UK as a home, whether as a place to live or for investment. On the contrary, the main thrust behind these changes is to stop the abuse of the current tax system, by which many millions have been lost to the UK economy by elaborate – even though legitimate – tax savings schemes.
The new changes are, therefore, in line with the UK Government's current drive – along with many other countries in the present economic climate - to counteract abusive tax schemes and recover additional revenue for the economy. The UK's first "general anti-abuse rule" (GAAR) was introduced this year to target tax avoidance arrangements entered into on or after 17 July 2013. More so than ever before, existing tax reliefs and exemptions and, for international clients, their non-UK domicile and/or non-UK resident status will need to be the primary basis of tax planning to mitigate UK tax. The recent introduction of a statutory test for UK residence will, it is hoped, give clients at least a greater degree of comfort and certainty on whether they may be subject to UK tax.
In line with the UK Government's anti-avoidance focus, Michelmores continues to advise its clients in connection with their developing tax strategy, on-going compliance obligations and UK property acquisitions with a focus on simplicity and practical solutions that fit in with clients' broader planning objectives.
Jonathan Riley is a Partner and Head of Tax, Trusts and Succession at Michelmores. He specialises in trusts, estate planning and the mitigation of Inheritance Tax and Capital Gains Tax for wealthy individuals and often advises non-uk domiciled clients. Michelmores' Private Client Team has been awarded UK and Ireland Regional Team of the Year at the prestigious STEP private client awards 2013/14.