23 August 2012

UK property held by offshore companies: consultation response

Mishcon de Reya has responded to the Government consultation document: "Ensuring the fair taxation of residential property transactions" which covers:

  • The Government's new 15% SDLT charge on corporate purchases of UK residential properties worth over £2 million; and
  • The Government's proposed introduction of an annual charge and capital gains tax charge in relation to UK residential properties worth over £2 million in corporate structures.

A headline summary of our concerns and recommendations is set out below. If you are affected by any of these changes, please contact Andrew Goldstone, Jonathan Legg or Kassim Meghjee for further advice.

1. Our concerns about perceived SDLT avoidance

In our experience, most purchasers of high value residential property will not buy an existing company that owns the property but rather will buy the property itself. Except in a small number of very high value cases, we disagree with the Government's view that offshore companies are always used for the purpose of SDLT avoidance. We feel the proposals are a disproportionate solution to the perceived problem.

2. Our concerns about pushing non-doms to hold UK property directly

There are many reasons why we often advise non-UK resident and non-domiciled clients to purchase valuable UK property through an offshore company, none of which are to do with stamp duty land tax (SDLT). If the Government's real intention is to bring non-domiciled individuals within the scope of UK inheritance tax (IHT) by forcing them to own their properties personally, we feel they should say so expressly and consult on this separately.

3. Our concerns about the extension of the capital gains tax (CGT) regime to non-residents

The consultation paper makes frequent references to the fact that the Government now wishes to align the CGT taxation of residents and non-residents. This is a major policy change and we feel strongly that this should not be buried in a consultation paper dealing only with SDLT and high value residential property.

4. Our concerns about dismantling corporate structures

It is clear the Government would like existing enveloped properties to be "de-enveloped" – i.e. removed from company ownership. However, there are very significant difficulties in expecting taxpayers to dismantle complex company structures before April next year given that the legislation will in all likelihood not be finalised until autumn / winter 2012 and the dismantling will rely on the co-operation of offshore agents. Individuals might also trigger an immediate tax charge or other tax-related penalty when they unwind existing structures and so the Government should consider some kind of time limited "de-enveloping" relief if it really wishes to encourage the winding up of structures.

5. Our concerns about property development businesses

We believe the exemption for property development businesses is too narrow. For example, the 2 year trading history requirement is far too arbitrary, and gives established property developers a significant advantage over new developers or joint venture companies which are set up by established developers. We also believe bona fide landlords should be exempt as they are not the intended target of this legislation.

6. Our recommendations:

a. Extend the period for taking properties out of companies by 12 months until April 2014.
b. Ensure that taking properties out of companies will not itself trigger a capital gains tax charge.
c. Owners of property development companies should be allowed to self-certify each year to avoid the new charges.
d. Introduce a "genuine business" exemption for commercial landlords and other genuine property investors.
e. Consider abolishing the 15% SDLT charge and impose a 7% tax charge (equivalent to the avoided SDLT) where shares in the company itself are sold and repeal the annual charge and CGT charge. If the property itself is sold by the company then there is no need for any new tax charges since SDLT will not have been avoided anyway.
f. Alternatively, apply the 15% SDLT charge only to new corporate purchases where the property is worth more than £5 million.
g. Do not impose an annual charge or a CGT charge if 15% SDLT was paid at the outset, as this is a sufficient deterrent to new corporate structures.
h. Where existing corporate structures are not dismantled, the annual charge and the CGT charge should only apply where the property is worth over £5 million.
i. The Government should consult separately on the IHT treatment of non-doms and the CGT treatment of non-residents

To read our full consultation response, please click below.