More bad news for non-doms

Residence & Domicile Mar 29, 2012

Non-domiciled individuals have been watching this Budget particularly carefully as it had already been announced prior to its delivery on 21 March 2012 that the Chancellor would be taking action in relation to individuals who acquire UK property through offshore companies. To tackle what the Government calls the 'enveloping' of high value properties into companies to 'avoid paying a fair share of tax', three measures are to be introduced:

a new 15% rate of stamp duty land tax (SDLT) to purchases of UK residential properties worth over £2 million by 'non-natural persons'
an annual charge on UK residential properties valued at over £2million owned by such persons
an extension of the capital gains tax (CGT) regime to gains on the disposal of UK residential property and shares or interests in such property by non-natural persons who are non-resident

The 15% rate applies from Budget Day but the annual charge and the changes to the CGT regime will be the subject of consultation over the summer and the intention is that they will commence in April 2013. Thankfully, the Chancellor has not extended this charge to commercial property. This is sensible because there are often good reasons for commercial property to be traded by way of a special purpose vehicle.

The Budget 2012 policy costings state that the levels of the annual charge will be set at £15,000 pa for properties valued at between £2 and £5 million; £35,000 for properties valued at between £5 and £10 million; £70,000 for properties valued at between £10 and 20 million; rising to £140,000 for properties worth more than £20 million. Introducing an annual charge on capital values means that the UK now has its first form of wealth tax (just like France and Spain).

There is scant detail on the proposal at this stage and it will be interesting to see how the consultation document will address the multitude of practical issues that will arise when implementing such changes. Valuation issues will be key for properties already in such structures. Will the rate be fixed at the time the property was acquired or will annual or at least regular valuations be required? Will residential property be caught by the provisions if it is in fact held as a commercial investment, being rented out on arm's length terms?

Until more details are made available, it's probably too early to take any action, but owners of residential properties hosted in offshore companies have causes for concern and should definitely keep an eye on what the consultation will produce.