Briefing update on the draft high value capital gains tax residential property legislation and consultation response.

1. Briefing update on the draft high value
capital gains tax residential property
legislation and consultation response
The draft clauses issued by HM Treasury on 31 January 2013, which will form part of
Finance Bill 2013, follow the draft legislation on annual residential property tax (ARPT)
issued in December 2012 and the consultation on 'ensuring the fair taxation of residential
property transactions'. The new clauses detail the capital gains tax (CGT) provisions
applying to ARPT related disposals.
The issue NNPs are broadly companies, partnerships with companies
The Chancellor announced at Budget 2012 that the amongst their partners or collective investment schemes. The
Government is seeking to challenge those who it considers definition also includes joint property ownership where one of
avoid paying their fair share of tax by purchasing high value the partners is a NNP.
residential property via corporate entities, and other so called
'envelopes'. Extension to UK companies
An important point to note is that the rules will now be
Draft legislation containing some of the measures was extended to include UK companies, as indicated in December
published in December 2012, with the remaining draft 2012.
legislation being issued on 31 January 2013.
There are a number of exemptions available from the
The Government's proposals extended CGT regime and these are aligned with the
The Government is seeking to address perceived avoidance exemptions from the increased rate of SDLT and ARPT. The
with the following measures: exemptions are as follows:
1. Increased rate of stamp duty land tax (SDLT) • Property development businesses
2. ARPT • Property rental businesses
3. ARPT related capital gains • Property trading businesses
• Properties which are run as businesses
Our previous briefing note considers the SDLT and ARPT
• Dwellings held for employee accommodation
measures, whilst this note focuses on the ARPT related capital
gains rules. • Charities
• Farmhouses
ARPT related capital gains • A number of other exemptions relating to
The Government's draft legislation introduces an extension to diplomatic/publically owned/properties
the current CGT regime to include disposals by 'non-natural' conditionally exempt from inheritance tax.
persons (NNPs) of UK residential property valued over £2
million.
Issued: January 2013

2. Tax rate Other points to note
The rate at which ARPT related CGT will be charged to NNPs There is a lack of clarity regarding some of the proposed
affected by these rules is 28%, with a tapering of gains where exemptions under the ARPT rules that were published in
the residential property is worth just over £2 million. This is to December 2012. This is unfortunate because these exemptions
remove any incentive to sell a residential property at have been effectively imported into the new ARPT related
undervalue to fall below the £2 million threshold, thereby CGT provisions. The rules in relation to those engaged in
avoiding the tax altogether. farming related activity also require clarification.
ARPT related CGT will only arise on gains accruing after Current structures
the introduction of these rules, resulting in an effective The new ARPT related capital gains changes will take effect
rebasing for CGT purposes at 5 April 2013. from 6 April 2013. This leaves a very short time frame for
taxpayers to assess the tax efficiency of their structures before
The rebasing to market value as at 5 April 2013 will be the proposals come into force. The impact of these rules is
automatic. Whilst any gain prior to 6 April 2013 should fall wide ranging and particular care should therefore be taken
outside of the new ARPT related CGT rules, this will not when considering changes to current structures and the
preclude the operation of any other anti-avoidance provisions creation of new ones.
in relation to gains attributable to the period prior to 6 April
2013. The current proposals do not contain any provisions to
soften the effect of the tax where UK residents occupy
It is possible for an irrevocable election to be made to properties held by NNPs. Any UK residents occupying such
disapply the rebasing. Whilst certain aspects remain unclear, it properties currently held in this way should seek advice.
appears that the intention is that gains will be calculated by
reference to the original base cost of the property rather than In addition, there are no transitional provisions to either
the rebased value. This may be relevant where the property has limit the charge to tax under existing legislation or to relieve
decreased in value between purchase and 5 April 2013. any double charges in relation to steps taken prior to 6 April
2013 to remove high value residential properties from their
The calculation corporate envelopes. Again, care should be taken and advice
The draft legislation sets out the detail of how to calculate the should be sought before making any changes.
new ARPT related CGT charge. These will apply by reference
to a period where the residential property falls within the Response
ARPT regime. The calculation apportions the charge between Grant Thornton will be responding to the Government's draft
phases when the residential property falls within the ARPT Finance Bill clauses and the CGT proposals. We would be
rules and phases when it does not. grateful for your input.
Losses The consultation closes on 22 February 2013, so please let
The new legislation also includes provisions on how to treat us know your thoughts in good time for us to include them in
capital losses arising on ARPT related disposals. It is intended our response.
that ARPT related losses will be subject to a separate, but
parallel, regime. These will fall outside of the normal CGT or Further information
corporation tax rules. This means that ARPT related losses will Further information on ARPT and our previous briefing paper
be ring fenced and can only be set against ARPT related gains can be found on the Grant Thornton Autumn Statement
either in the same tax year or in the future. pages. If you would like to discuss the draft legislation, or how
these new rules could affect you, please feel free to contact one
Anti-fragmentation of our experts using the details below.
The draft legislation also contains anti avoidance provisions
aimed at preventing the avoidance of these new rules through Contact us for further information:
the fragmentation of a single asset into a number of less
valuable assets. Kersten Muller
Partner, Real Estate Tax
Valuation T +44 (0)207 728 3139
It will be necessary to obtain a valuation of the property as at 5 E kersten.j.muller@uk.gt.com
April 2013 to calculate the gain arising when the property is
eventually sold.
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