Last week Nick Clegg announced that the Government would introduce capital gains tax (CGT) on sales of UK property made by non-residents. The new measure seemed to be aimed primarily at wealthy foreigners who had purchased London property but would also catch the large number of UK expats who hold UK property investments.
Most UK property has gone up significantly over the last few years. Up until now non-residents have not been liable to CGT in the UK and this has been one of the great attractions of the UK property market for investors from abroad whether they be non-UK persons or UK expats. The rate of tax was not disclosed but is likely to be the normal 28% CGT rate.
Mr Clegg said the Chancellor would be giving details on these new measures in his autumn statement due on 5th December. As usual Mr Clegg stated that the purpose of the changes was to ensure that people paid "their fair share" of tax. Fair share in the language of the day means "more". In the view of others, a fair share might be the amount which legislation stated they would have to pay when they invested rather than an arbitrary additional amount judged to meet the needs of the government of the day.
Investors in UK property might rightly be disappointed by this further ambush. It was not very long ago that the government announced the Annual Tax on Enveloped Dwellings (ATED) – an annual tax on companies, but not individuals, which own property worth more than £2 million. And don't forget that there were significant increases in stamp duty (SDLT) over the last few years.
For sure London property in particular has attracted vast investment from abroad. Foreign investment has certainly helped to push London prices to record highs. This has made it difficult for Londoners to get on to the property ladder but also made significant sums of money for many who took the plunge years ago. On occasions when there has been a significant drop in prices, many buyers have been left with negative equity resulting in bank repossessions and significant financial problems. It is the locals who have taken out high mortgages to fund their property purchase who are most at risk from significant price drops. Foreign investors are generally much better placed to ride out the storm.
Some commentators believe that these new measures will have a significant effect on UK property prices particularly in London. Others believe that the momentum is such that price rises may be slowed but price reversals are unlikely. Certainly London property has become an important asset class and a safe haven for foreign money. During the European economic crisis (which is arguably not yet over) there was a flood of Greek, Italian and Spanish money into London property. And London property has long been a preferred destination for Middle East and Russian money. We will have to see whether that flood dries up because of this tax change. There is certainly a risk that the frequent and disadvantageous changes will have a negative effect. And there are still rumours that the Government will introduce an all-encompassing "Mansion Tax" which would be payable by everybody. Change is unhelpful. Investors prefer a stable and reliable framework for investment.
The UK is unusual in not charging CGT when non-residents sell. Most other countries charge CGT to everyone. The UK gives an exemption from CGT to UK residents as long as the property being sold is their main residence. That again is unusual.
Details of the way the tax will work will be announced, hopefully, on 5th December but will be introduced in the budget next year. It could be that only future gains in property values are subject to CGT. If so all property values will be rebased for these purposes to the date of introduction of the tax. Charging CGT on historic gains dating from the date of acquisition would generally not seem to be fair but is still a possibility. Certainly it would raise a lot more revenue for the UK Chancellor if he did retrospectively tax these gains.
They do say it pays to be paranoid so those who have purchased property long ago might want to take precautions. Perhaps the most sensible precaution would be to transfer the property before 5th December. This should rebase the value of the property for CGT purposes. If the property is worth significantly less than £2 million or is to be tenanted the most sensible option might be to transfer to a company. The new ATED would not apply unless and until the property rose in value above £2 million and does not apply to investment property which is permanently rented out. There would be a fixed rate of income tax on rental income at 20% and future CGT and SDLT might be avoided on resale by transferring the shares of the company.
Properties worth more than £2 million occupied by the owners or not rented out would be subject to the ATED if owned by a company. For those properties transferring to a trust structure is generally the best option. Non personal ownership has long been the preferred option for UK non-domiciled persons who are subject to UK inheritance tax (IHT) at 40% only on UK situated property. This tax is penal. Having the property owned by a company or trust means that IHT will never apply as the owner doesn't die. Those still domiciled in the UK achieve little by corporate ownership on its own as they are subject to IHT on their worldwide estate. The shares of the company would be worth the same as the property so the same amount of tax would apply. Corporate ownership does facilitate an easy and cheap rearrangement of ownership. It is relatively easy and simple to transfer the shares in a company to a trust if the UK expat can later establish an alternative domicile outside the UK. And/or IHT can be avoided by having the shares of the company held by a Qualifying Non-UK Pension Scheme (QNUPS) so even UK expats who retain their domicile may still want to consider a transfer to corporate ownership or a QNUPS if they have property currently in their own name. Either option is sensible planning irrespective of the changes to come so is worthy of consideration even if it is believed that the taxation would not be retrospective.
So time to review options yet again. Wait and see might prove costly.
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