The Treasury and HMRC have long believed that there’s not really good reason for a company to own a dwelling and that anyone controlling a corporate owner of a dwelling must be engaged in tax avoidance. The 2014 Budget shows that this mind-set still flourishes in the Chancellor’s thinking.
Anyone non-natural person (“NNP”) buying a dwelling for more than £500,000 on 21 March 2014 or later will pay 15% SDLT on the purchase. On a £500,001 purchase this puts the SDLT charge up from £20,000 to an eye-watering £75,000. Those who exchanged binding contracts on 20 March or earlier will escape the increase provided they do not vary the relevant contract after that date.
Individuals (i.e. natural persons) buying property need not worry, nor need NNPs acquiring property to be held on behalf of beneficiaries that are all individuals. However if a partnership or a number of joint purchasers include at least one NNP, the penal 15% rate applies in full, however small the NNP’s share of ownership is.
There are some reliefs mainly aimed at NNPs carrying on genuine commercial businesses. These that have the effect of reducing the SDLT rate on a purchase for more than £500,000 but less than £1m to a mere 4%, but these are all hemmed about by conditions and can be withdrawn if the wrong sort of event happens within three years after the acquisition.
Moreover the Chancellor has announced that the Annual Tax on Enveloped Dwellings (ATED) will be extended to NNP-owned dwellings worth more than £1m from 1 April 2015 and to NNP-owned dwellings worth more than £500,000 from 1 April 2016. ATED is an annual wealth tax on NNP-owned dwellings. The ATED rate for dwellings falling in the new £1m – £2m band in 2015 will start at £7,000 a year. The rate for the new £500,000 to £1m band in 2016 will be £3,500. Those who decide to “unwrap” dwellings from corporate wrappers in response should not underestimate the tax costs (including possible CGT and SDLT) of doing so. Those who decide to stay “wrapped” and pay ATED every year should similarly be aware that filing annual ATED returns and paying the tax is not as easy as falling off a log. However, to be fair, the HMRC is consulting about how to make filing ATED returns and paying the tax less administratively burdensome. Reliefs from ATED must be claimed in a return and generally mirror those available against the 15% penal rate.
The application of the penal 15% SDLT rate and ATED to dwellings worth as little as £500,000 will concentrate minds on what constitutes a dwelling for these purposes, and on how well (or otherwise) the reliefs work. One current, and as yet unsolved, problem is that where a 15% rate relief is claimed on acquisition and that ceases to apply during the three year withdrawal period, the fact that a different relief becomes available is no defence to a liability to pay the 11% balance due on withdrawal of the relief originally claimed.
Perhaps we shouldn’t be surprised. In its first year ATED raised more than five times the revenue forecast by the Treasury. The Chancellor can’t yet afford to ignore such a “nice little earner”.