UK residential property – when should I buy through a company?
There has been a relentless attack by the current UK government on perceived tax avoidance by persons who have purchased residential property in the UK through a company. Typically, non UK domiciled purchasers formed an overseas company to acquire the UK residential property interest and this company carried out no other activities other than its ownership of the property. The company was therefore a Single Purpose Vehicle (SPV).
The concern was that Stamp Duty Land Tax (SDLT) was being avoided because on a future sale the SPV was sold rather than the underlying property itself. This meant that on a sale of an overseas company owning UK residential property, there would be no Stamp Duty liability or SDLT liability, as long as the sale contract was executed overseas. This process could go on indefinitely, with each subsequent purchaser buying the shares in the SPV rather than buying the property itself, with obvious long-term damage to the Exchequer.
The first line of attack introduced by the government was the Annual Tax on Enveloped Dwellings (ATED), which applied from 2013/14, with a tax charge starting at £15,000 per annum on properties valued at £2m or more on 1st April 2012 (or date of acquisition if later). The charge increased to:
· £35,000 per annum for properties valued between £5m and £10mn
· £70,000 per annum for properties valued between £10m and £20m
· and £140,000 per annum for properties valued in excess of £20m.
The charge increases by inflation each year (so the basic charge is £15,400 for 2014/15) but the thresholds of £2m, £5m, £10m and £20m have not been increased.
The government has now announced that the charge will be extended to properties valued at between £1m and £2m with an annual charge of £7,000 from 1st April 2015 and to properties valued at between £500,000 and £1m with an annual charge of £3,500 from 1st April 2016.
There are a number of exemptions from the charge; the main ones of which are where the property is used for the purposes of a property rental business (as long as the property is let out to unconnected third parties) and where the property is used for the purposes of a property development trade. Note that an annual ATED return must still be made even where an exemption is due. Therefore, the compliance burden will increase enormously over the next couple of years as more and more lower value properties are brought within the ATED charge and returns must be completed even where they are exempt from the charge.
Although ATED was originally advertised as compensating the Exchequer for lost SDLT revenue, the government continued its attack on these structures by increasing the rate of SDLT to 15% on purchases by companies of residential property valued in excess of £500,000 after 20 March 2014. There are exemptions from the higher 15% SDLT rate similar to those for ATED and if such exemption applies, the relevant rate reverts back to 4% for purchase between £500,000 and £1m, 5% for purchases between £1m and £2m, and 7% for purchases over £2m. However, where an exemption is claimed such as where the property is to be used for a rental business, then the relevant activity must continue for a minimum of 3 years, otherwise the exemption will be lost and the SDLT rate will revert to 15%. For example, if an exemption is claimed because the property is being used in a property rental business, and at any time during the 3 year period the property is occupied by a connected person, then the SDLT exemption is lost and the additional SDLT must be paid over.
The final nail in the coffin for the purchase of residential property through an overseas SPV is the removal of the capital gains tax exemption for non UK resident companies who have an interest in UK residential property. Originally, the removal of the exemption was limited to overseas companies who were liable to pay ATED, so it only applied to residential properties valued at more than £2m where an exemption was not applicable. However, the government has announced that the exemption from capital gains tax for non-resident persons will be removed in total, with effect from 1st April 2015, although the final details are yet to be published.
So given all this penal legislation, when would anyone contemplate purchasing UK residential property through a company? WSM's view is that we can see very limited circumstances where a purchase within a company will still be beneficial if the ATED and 15% exemptions do not apply. However, there are still circumstances where it will be beneficial where the ATED and the 15% SDLT rate exemptions do apply. For example, where an investor is building up a long-term residential buy-to-let portfolio using third-party bank debt, there may be significant tax advantages from being able to repay the debt from retained profits taxed at the corporate rate of 20% rather than at personal tax rates of up to 45%. There will be an additional benefit for non domiciled investors in these circumstances when an overseas company is used, because the company, and therefore the underlying portfolio, will fall outside of their estate for Inheritance Tax purposes.