Economy & Investment News
This year’s Budget brought with it changes to Stamp Duty Land Tax and Capital Gains Tax, along with the extension of Annual Tax on Enveloped Dwellings. Here Paul Sellar, Director of Manors, summarises the new measures and discusses their likely impact on the property market in prime Central London.
Stamp Duty Land Tax (SDLT)
In his recent Budget, the Chancellor introduced an extension of the 15% SDLT charge for properties bought in corporate vehicles by owner occupiers. Initially introduced in 2012 for properties over £2m, 15% SDLT was extended to include all properties over £500,000 with immediate effect. However, residential properties used for ‘genuine commercial activities’, or in other words developers, traders, property funds and buy-to-let investors, continue to be exempt from the tax (such companies remain subject to the original lower SDLT rates, i.e. 4% over £500,000, 5% over £1m, 7% over £2m), although private rented sector companies will have to prove that the property has been used for ‘genuinely commercial’ purposes for a full three years following acquisition or they will be liable for the tax.
This measure is likely to encourage a proportion of investors who acquire residential properties in the UK in corporate vehicles to consider letting their properties instead of merely ‘holding’ them, in order to avoid the 15% tax. Indeed, those making a long-term investment, such as forward buying for their children’s tertiary education, can benefit from the tax exemption if they ‘rent it now and live in it later’ providing the three-year rule is met.
Any party that does qualify for the exemptions will need to make a claim in the SDLT return on acquisition.
Annual Tax on Enveloped Dwellings (ATED)
The Annual Tax on Enveloped Dwellings (ATED) which was introduced in 2013 for properties bought in corporate vehicles by owner occupiers has now been extended. From 1st April 2015, an annual charge of £7,000 will be introduced for properties between £1m and £2m and then from 1st April 2016 onwards, an annual charge of £3,500 will be introduced for properties between £500,000 and £1m. However, the same categories for exemption from the higher rate SDLT will apply for ATED, i.e. residential properties used for ‘genuine commercial activities’ and, given the sums involved, at Manors we don’t envisage ATED to be a significant deterrent to overseas investors in prime central London.
NB: If you do not qualify for ATED, you will need to send an ATED return to HMRC to claim relief.
Capital Gains Tax (CGT)
Many landlords are already facing heftier CGT bills following the Chancellor’s 2013 Autumn Statement when he announced a change to Principal Private Residence relief (PPR). From April 2014, the "final period exemption" for PPR has been halved from 36 to 18 months.
Prior to April, where a property had been your main residence at any time during your period of ownership, any gain made on the property in the last 36 months of ownership was effectively exempt from CGT whether it was your "main residence" or not during that period, thereby allowing taxpayers to "flip" this exemption from one property to another, so as to achieve PPR for the whole period for each property.
The "flipping rule" had been on borrowed time since it hit the headlines in connection with the politicians' expenses scandal, but it’s not just politicians who have been affected by the Chancellor closing this loophole. Indeed, any private individual with more than one property will now most probably be liable for more tax when they dispose of a rental property.
Those likely to feel the pinch most as a result of the PPR changes are small or "accidental landlords" who generally only have one property in their portfolio, which was once their main home. The level of extra CGT these landlords will have to pay depends on the increase in value of the property and the time they spent living in it.
In the recent Budget, the government has now proposed to introduce CGT on future gains made by non-residents disposing of UK residential property from April 2015 in order to ‘level the playing field’ and make the rules consistent with UK resident buyers who already pay CGT. Other countries already have similar regimes and, in fact, some elect to penalise foreigners considerably more than their domestic owners, so if anything, the UK remains more liberal than other investment markets. Indeed, in markets such as New York or Paris, equivalent taxes can approach 35-50 per cent depending on the owner’s residency status. At Manors, we’re of the opinion that these changes to CGT, which after all is a tax on profit and not per transaction, are unlikely to deter investors. Instead, CGT will simply be factored in as a ‘cost of investment’.
CGT for properties bought in corporate vehicles by owner occupiers, where ATED applies, was introduced in 2013 (known as ATED-CGT). This has now been extended to include properties worth over £500,000. These charges will apply from the same date as the ATED (stated above).Gains will be rebased from this point, meaning that any rise in capital values prior to this date will be ring-fenced. This is positive news for property owners who have seen the value of their assets increase considerably in recent years as there was a fear in some camps that the Chancellor could have backdated CGT.
CGT for non-resident owners and companies holding property for their own use or buy-to-let will be applied from April 2015, with no minimum property value. Gains will be rebased from this point, meaning capital uplift to this date will also be ring-fenced. Again, this is positive news for existing owners who have seen the value of their assets soar in recent years as any historic gains are protected. Whilst the rates of tax for CGT for non-ATED qualifying properties are yet to be confirmed, it is said to be a ‘tailored’ charge.
Some exemptions apply to CGT. For example, a private residence relief (PRR) is being made available to non-residents in certain circumstances. In the case of expatriates who sell their main residence in the UK, PRR will be available for the time the property was used as a main residence.
Other exemptions already in place for UK buyers are also being applied to non-residents e.g.:
Annual Exempt Amount: £10,900 (2013-14) and all joint owners can use their exemption
Fees or commission for professional advice or services, for example, Capital Gains Tax valuations, solicitors' and estate agent or advertising fees
Improvement costs to increase the value of the property, Stamp Duty Land Tax and VAT (unless you can reclaim the VAT)
Any other capital losses from other assets in the UK, Some further important exemptions from the CGT already appear to be in place.
Property Funds that qualify as having Genuine Diversity of Ownership (GDO), as the Government “does not intend to tax non-residents on disposal of shares or units in a fund”
Investments through offshore pension schemes such as QROPS and QNUPs, subject to certain qualifications
In summary, it’s our view that residential property investors have got off comparatively lightly. The 2014 Budget hasn’t brought with it any really nasty surprises and the measures that have been introduced, whilst not without cost implications, aren’t severe enough to discourage investment in prime Central London. Stability has been maintained and two months on, as a company we still have an extremely high level of applicants looking to invest in residential properties in W1 or W2. It’s very much a seller’s market and there’s every indication that Central London will firmly remain a property investment hotspot for the foreseeable future.