How Non Doms can mitigate their Annual Property Tax
100% successful Tax planning for Non-Doms who pay annual residential property tax (ATED) on residential properties through using a CORPORATE STRUCTURE (Envelope/Tax Wrapper) .
Non-Dom Property Tax Planning - (Annual Tax on Enveloped Dwellings)
Typically, the clients that have been represented, have a PCL property held in an offshore company, usually but not always BVI. Due to the change in the law in the 2013 Finance Act, the Annual tax on Enveloped dwellings (ATED) was introduced which in effect created a new tax on those residential properties held in a corporate wrapper. This strategy was introduced to combat the avoidance of SDLT when a purchaser could merely buy the shares in the company without paying SDLT proper, thereby sidestepping the hefty Stamp duty rates. So the ATED rate would be on a sliding scale depending on the value of the property. At first the tax was due on residential properties worth over £2m but this has now changed and applies to properties worth over £500,000 held in a company name.
There are statutory exemptions and reliefs from the payment of the ATED. These include property rentals and agricultural businesses, but more importantly there are exemptions where the company is acting in its capacity as a corporate trustee.
Our associates have applied this exemption to over 11 PCL properties and have successfully obtained exemption from liability to pay the ATED. They have to show HMRC the paperwork showing the company’s position and the trust deed has to reflect this accurately. Once satisfied, HMRC will write to them confirming the relief.
They usually charge their fee based on the value of the tax due on the property, typically it would be circa 40% + vat and disbursements. They ask for the whole amount to be paid into their client account. They take 50% as non-refundable fees and then once they have confirmation of the relief, they will take the balance as reflected and agreed in their engagement letter.
The UBO of a trust which has as its trustee the company owning the property will apply to be exempt from the liability of the ATED. They re-submit the ATED returns and claim the relief once they have reviewed the paperwork and trust deeds in conjunction with the offshore trustees and ensured that the company is correctly structured before they make the application.
Please note that as a Trust is involved a UK resident would not be able to claim the relief as the value of the property would exceed the IHT threshold.
The Annual Tax on Enveloped Dwellings
The 2012 Budget saw an out and out attack by the Government on all Stamp duty Land Tax avoidance schemes which utilise a company or corporate envelope to purchase and hold any UK property.
This was as a result of the loopholes that were available for the purchase of a property through a company, which avoided the liability to pay SDLT on the purchase, as well as IHT and CGT on offshore company gains.
Not only did the legislation increase the SDLT from 5% to 15% on future transactions going into a corporate structure but there is now a liability to pay an annual charge on those properties held by a company (the Annual Tax on Enveloped Dwellings or the ‘ATED’) s.95 & 96 Finance Act 2013.
Annual chargeable amount Taxable value of the interest on the relevant day:
£3,500 Greater than £500k but not greater than £1m *
£7,000 Greater than £1m but not greater than £2m **
£23,350 Greater than £2 million but not greater than £5m
£54,450 Greater than £5 million but not greater than £10m
£109,050 Greater than £10 million but not greater than £20m
£218,200 Greater than £20 million
*as of the 1st April 2016 ** as of the 1st April 2015
The relevant clause in the Finance Act 2013 provides some main reliefs against the tax for:
1) Residential dwellings that are leased out in a property rental business;
2) Held for sale in a property development or trading business;
3) Exploited in a trade of permitting the public to visit, stay in or otherwise enjoy the property;
4) Provided for employees to use in the owner’s trade.
5) Commercial Properties valued at over £2m.
6) Residential Properties valued at under £500,000.
In practice, the annual tax on the property will be exempt from payment by applying the legislation to include the Statutory Reliefs. My Associates have extensive experience in this field and has obtained approximately 18 exemptions for clients holding Prime Central London and other valuable UK properties, with written confirmation of the said exemptions from HMRC.
There are also statutory exemptions, (which differ from Reliefs) and will qualify those companies for exemption from the ATED as well.
Care is to be taken however, that the property is not vested with a tax avoidance scheme in an attempt to avoid the ATED as this measure will fall foul of the GAAR and hold the user responsible under the anti-avoidance measures legislated for under the 2012 and 2013 Finance Acts.
If no action is taken, then daily penalties and interest may apply.
The simplest way forward would be to apply the Statutory exemptions through a Trust.
A compliance check may be undertaken by HMRC so the documentation has to be drafted correctly and in accordance with the rules.
To examine the company structure to see if it qualifies for any of the reliefs or exemptions.
If they qualify, then the next step would be to ensure that the correct return is made to HMRC, as an incorrect return would involve lengthy and unnecessary correspondence as well as a compliance check. Those companies that have made an incorrect ATED return in haste and in order to comply with the October 1st 2013 deadline may find that the return made has declared a liability erroneously.
We are able to ‘unwind’ the return and submit the correct paperwork, (given that the Client does indeed qualify for relief) and we a have 100% success rate in the re-submission of incorrect ATED returns, with written confirmation from HMRC granting the exemptions.
If they do not already qualify then the holding can be re-structured to obtain the Statutory relief.
The Legal traps
There are many ways of extracting land from a company in a stamp tax efficient form but these may be subject to many disadvantages as regards company law and taxation in particular. There may be other areas of potential detriment depending upon the nature of the property and the circumstances.
NB: Following the case of HMRC v Vardy September 2012 an incorrect implementation process can be the basis of a successful challenge by HMRC despite the taxpayer having a sound basis in law upon which to rely in the scheme process.
The 2015 Finance act has introduced measures to impose Capital gains tax on non-resident non-natural persons who sell property after April 2016 subject to the statutory criteria laid down. Inheritance tax will also be applicable to non-residents who own UK property.
The Alternative Solution- De-enveloping
This would be to transfer the ownership of the property from the Company into the name/s of the individual/s.
There would not be an SDLT liability as long as the transfer was carried out for no valuable consideration. The disadvantage to this measure would be the liability to Inheritance tax once the individual has passed away, as well as removing the cloak of anonymity for the individual or family concerned during their lifetime; this would be the case even if they are not UK nationals, non-resident or non-domiciled.
This ATED re-structuring measure is not an HMRC avoidance scheme, and therefore would not be disclosable to HMRC. It is simply an affirmation of the Law, as well as a correct correspondence process with HMRC to ensure that the exemption or relief is correctly submitted without raising a compliance check.
We have obtained relief from the ATED for several high value properties, even after the owners have submitted returns and made payment.
These reliefs have been confirmed in writing by HMRC ATED in Wolverhampton and can be perused by interested parties at my Associates offices.
The Next Step
If you would like to discuss your case further, then we would ask you to make an appointment to see us in our office so that we can go through the finer details.
To make an appointment please contact me on the number below.