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Tax Avoidance & HMRC Impact on the Property Market

HMRC has quite rightly, in my opinion, challenged everything connected in aggressive tax avoidance schemes, which includes avoidance of stamp duty land tax and capital gains tax by using non-commercial and contrived schemes.

So has HMRC’s adopted approach had a material effect on the UK property market? I think so, but at the higher value end of the market when I do sympathise with high net worth individuals paying tax on everything.

Some arrangements include residential property owned by companies.

Annual Tax on Enveloped Dwellings (ATED) was introduced with effect from  1 April 2013, for residential properties worth more than £2 million owned by companies. For the year to 31 March 2014, the ATED was between £15,000 and £140,000, depending on the value of the property. There are exemptions, but generally the criteria (farmhouses, historic buildings, charities, etc) are not satisfied.

I have a number of Offshore clients observing the 90 day rule. Generally, companies and individuals who are not resident in the UK for tax purposes are not charged to capital gains tax (CGT) on UK assets, unless those assets are used for the purposes of a UK trade (NB. “UK trade” does not include a rental business). One very common structure for non-domiciled individuals was to have an overseas company with UK rental properties. The company would borrow from the individual so that the interest was offset against the rental income, meaning very little corporation tax was paid on the rental income.

When the properties were sold, no tax was paid on the capital gain. To plug this loophole, with effect from April 2013, non-resident companies have been subject to CGT at 28% on any UK residential property which is subject to the ATED.

There are even HMRC proposals to introduce CGT on gains made by non-resident individuals after 5 April 2015 on sales of residential properties - note there’s no threshold of £2 million as there is with companies, so individuals are at a disadvantage. However, these proposed HMRC measures are still subject to consultation, so the detail is not clear. It may be that it only rises in value between April 2015 and the date of sale that are subject to tax. This change does not affect commercial properties, possibly because of the high level of overseas investment needed to fund that market, particularly in the South of the country where prices are astronomical.

Currently the appetite of overseas investors in the UK residential market place has not diminished due to these recent HMRC developments (excuse the pun). On the contrary, overseas investment is increasing, not only in the South but also in the Northern regions - rather than buy-to-lets which was the case a decade ago. Rents are low compared to capital values. Investment properties are being bought in secondary areas just outside of central London because yield is better. Compare that to yields in other regions which are high, and consequently overseas money is pouring into the private rented sector that might create a competitive problem for local investors around student let conurbations. Although, contrast that with what may be regarded as lack of suitable stock.

So far, the Russians may not be coming due to political threats of freezes on vested assets and therefore recent UK tax increases may just be one factor alongside the political positioning?

Some landlords are accidental, some are high net worth capital investors and some are found in difficult situations caused by being suckered into tax avoidance schemes that sounded good but are in fact too good to be true. You don’t have to be a high profile pop star or footballer to fall into the trap and that is why I am in the business of regularising client tax affairs and settling HMRC disputes.

I am careful to add that my above comments ar