Stamp Duty: Who Wants to Buy a £20m House?

Will clobbering the rich also hammer the property investment market?

In the budget earlier this year, the government set out to close the now well-known stamp duty loophole of holding expensive property in overseas companies.

It was part of George Osborne’s attack on “morally repugnant” tax evasion and aggressive tax avoidance.

There was an immediate increase in the Stamp Duty Land Tax (SDLT) rate applied to residential properties over £2 million bought by a company - the new rate is 15%.

 The government is now consulting on two further measures announced in the budget:

·         The introduction of a new annual charge on residential properties worth more than £2 million held through companies, to commence in April 2013.

·         Charging capital gains tax (CGT) at the usual rate on residential property held by overseas companies (at the moment non-UK residents don’t pay CGT at all), also to commence in April 2013.

If you want more detail or are having trouble sleeping, have a look at the consultation document – “Ensuring the fair taxation of residential property transactions”.

One issue however has been raised by many in the property world since the budget.

The 15% rate doesn’t just hit property bought by overseas companies for the purpose of minimising SDLT, but hits other companies too.

So for example this imposes a potentially huge stamp duty liability on property investment companies when they buy expensive residential properties, mostly in and around London.

It also hits property development companies who have not been trading long enough (currently two years) to qualify for exclusion from the new rules – so damages new entrants to the market and impedes setting up special purpose joint venture companies.

On the face of it the proposed new annual charge would hit these companies too.

The government has now acknowledged this in the consultation (in paragraphs 1.9 and 1.10 and chapter 2.).

It says its aim is “to target the 15% SDLT rate and the annual charge at those circumstances where tax avoidance may be a significant factor... whilst minimising where possible the wider impact for bona fide businesses.”

But this won’t give any comfort to companies buying residential property now.

The 15% rate was introduced in the budget immediately and applies whether or not tax avoidance is a factor.

The government is asking for views on how to address the concerns of bona fide residential development and investment businesses without undermining the “core policy intent” of addressing tax avoidance.

So it will be interesting to see what comes out of the consultation, which closes on 23 August 2012.

What will the annual charge amount to?

The government says it will be £15,000 per year for houses just over the £2m threshold, rising to £140,000 per year for houses valued over £20m, to be increased annually in line with the increase in the Consumer Prices Index.

Merryn Somerset Webb writes on Money Week – “Why £20m really is too much to pay for a London House” – that Baker Tilly has run some numbers.

“Say you buy a £5m house via a non-resident company. Then assume that you hold it for five years and it grows in value by 5% a year. The initial stamp duty will come to £750,000. The annual charges would be almost £200,000 and the CGT would come to nearly £400,000 making a total tax charge of £1.35m – roughly the same as the rise in value of the property. There’s more than just money for the holders of houses held through companies to think about too: a good many of them have never had to engage with our tax authorities at all. Now they will have to. Good bye anonymity. “

If you were about to buy a £20m pound house in the UK now, she wonders who might take it off your hands at any sort of similar price should you want to sell it in 2013.

I’m guessing however that this is not a problem that will lose many readers of this blog much sleep - but if I’m wrong you can always try reading the consultation document.