Taxes on company-owned high value homes and new statutory residence test come into force this week

The new 'annual tax on enveloped dwellings' will be charged every year on residential properties valued at over £2 million held by a 'non natural person', such as a company. For the most expensive houses – worth more than £20 million - the charge will be £140,000.

Janet Hoskin, a tax expert at Pinsent Masons, the law firm behind Out-Law.com warned that, although there might be a temptation to restructure to avoid the new tax, “the best option may be to do nothing".

The annual tax on enveloped dwellings (ATED) applies to 'non-natural persons'. A 'non-natural person' is a UK or overseas company; a collective investment vehicle; or a partnership in which one or more members is a company. However, some corporate entities are not counted as a ‘non-natural person’. These include trustees, or a company acting as a trustee of a settlement; companies acting as nominee for the beneficial owner who is an individual; and bona fide property development and investment companies.

Holding UK property through a trust or company can avoid inheritance tax for non-UK domiciled individuals. For example, using an ‘excluded property trust’ places the trust capital completely outside the inheritance tax (IHT) net. Similarly, if the trustees and/or the company are non-UK resident, they do not have to pay capital gains tax when they sell the property.

Janet Hoskin said that, although the new charge could be avoided by restructuring so that property is not held by a non-natural person, “it is important to realise that the best option may be to do nothing." She said  "Not only are there dangers in triggering tax in unwinding existing structures but also the new tax charges may be less than those applying if the structure is unwound”. 

Hoskin said that in the case of an intended beneficiary and occupant of a £2 million property with a short life expectancy, it may be more cost-effective to retain the structure as the ATED is likely to end up being less than the IHT charge of £800,000 plus the costs of revising the structure. She said that, on the other hand, if the beneficiary has a longer life expectancy, it might be financially advantageous to appoint the property out of the company and look to manage the IHT liability in other ways.

“To find the right option for each specific individual or family needs a detailed review of their specific circumstances" said Janet Hoskin. "This will include considering the age of an individual, their financial circumstances and how long they intend to retain a property, as well as considering the tax implications”.

The amount of ATED will depend on the value of the property on 1 April 2012, or its purchase price if it is acquired after this date. ATED of £15,000 a year is payable for a property valued between £2 million and £5 million; £35,000 for a property worth £5 million to £10 million and £70,000 for a property worth between £10 million and £20 million.

In addition to the ATED, from 6 April, 'non-natural persons' will be subject to capital gains tax at 28% in respect of gains accruing on the sale of high value residential properties that are subject to the ATED. At present non-UK resident companies do not pay UK tax when they sell UK assets. There is also a 15% rate of stamp duty land tax when residential property costing over £2 million is acquired by a 'non-natural person'.

Another development, relevant to many high net worth individuals, is the new statutory residence test which applies from 6 April this year. This is designed to give greater certainty and clarity as to whether or not individuals are UK-resident for tax purposes and therefore whether or not they are subject to UK income tax and capital gains tax. The current law on tax residence depends on past court rulings, dating back many years and guidance from HMRC.

“Now that the rules are set out in legislation the position is clearer than it was in the past," Hoskin said. "Yes, some uncertainty remains and some individuals are disadvantaged under the new rules, but overall the position is clearer than applying outdated case law.”

The new statutory residence test distinguishes between ‘arrivers’ and ‘leavers’. Arrivers are people who have not been resident in the UK in any of the previous three tax years. Leavers are those who have been. Arrivers and leavers must use different measures to establish their residence status.

The first part of the test is an ‘automatic overseas test’. The automatic overseas test sets out factors which, if they are met, prove that a taxpayer is conclusively non-resident. These include spending less than 46 days in the UK in the tax year for arrivers and 16 days for leavers or working full time abroad. If the individual is not conclusively non-resident, you then move on to the 'automatic residence test', which sets out factors which prove someone is definitely UK-resident. These include working full time in the UK, spending more than 183 days here for arrivers and for leavers having a home here, coupled with spending a number of days in the UK.

If an individual is neither conclusively resident nor non-resident under these tests, the ‘sufficient ties test’ applies. This sets out five further factors which must be considered, together with the number of days spent in the UK, in order to determine an individual’s residence. The five connecting ties are family, accommodation, substantive work in the UK, UK presence in the two previous tax years and more days spent in the UK in a tax year than in any other single country.

“The key under both the old rules and the new legislation is to keep detailed careful records," Hoskin said. "It is vital to be able to refer to precise details of all visits to the UK, their length and purpose including where you stayed and whether any time was spent working.”