Amendments to the UK’s 2013 Finance Bill will mean that foreign buyers of luxury residential property who use an offshore company will have to pay more tax but not genuine commercial investors.

The UK Chancellor George Osborne announced in his March Budget that he intended to close an alleged £1 billion stamp duty loophole where some super rich foreigners avoided paying the levy by putting expensive homes in offshore companies.

Residential properties used for ‘genuinely commercial activities’ will be relieved from the 15% rate for corporate vehicles holding properties valued above £2 million, the goverment has confirmed.

It means that bona fide businesses such as developers, traders and for investors holding buy to let properties, will instead pay a more general 7% rate introduced at the same time for properties over £2 million.
 
The relief will have no restriction on the number of properties held by a company.  This means there will be no discrimination between size of company or length of trading history.
 
A ‘claw back’ regulation is also to be introduced. It means that companies will pay the additional 8%, taking the total to 15%, if they fail to prove the property has been used for genuinely commercial purposes within three years.
 
The Annual Levy, which will  be called the Annual Residential Property Tax (ARPT), is expected to come into effect on 01 April 2013 and will be payable by 31 October for the first year. Thereafter it will be due on or before 30 April.

The tax will amount to £15,000 on properties bought for between £2 million and £5 million; £35,000 for properties between £5 million and £10 million; £70,000 on properties between £10 million and £20 million and £140,000 on properties sold for more thatn £20 million.
 
The tax will have the greatest impact on the prime London central (PLC) market where 60% of properties about £2 million are located, according to Naomi Heaton, chief executive officer of London Central Portfolio Ltd, fund and asset managers that specialises in this property sector.
 
'Whilst all investors of £2 million plus properties will still be liable for the 7% stamp duty, this positive clarification by the government as to the exemptions from the 15% SDLT and ARPT (Annual Levy) means the wait and see attitude adopted by buyers should now diminish. This had caused transactions to drop by 9% in the last quarter and resulted in a declining tax take for the Exchequer,' she said.
 
'It is likely that the 7% SDLT will be absorbed in due course, just as the dampening effect from the 5% rate for properties above £1 million from the 2011 Budget has finally been rectified. Nevertheless, the domestic market is still reeling from this rise, with transactions falling 53% in Greater London for properties costing over £2 million,' she explained.
 
She believes that the 15% tax and new ARPT may be a small price to pay for owner occupiers purchasing through a corporate vehicle, in relation to the benefit of owning a property in London, IHT savings and personal privacy. 'This levy is likely to be accepted as part of the investment cost, in the same way as a series of SDLT rises seen over the years have,' she said.
 
She added; 'The government should be applauded for this considered decision and the recognition of the genuinely commercial contribution of residential investment and the private rented sector. Hopefully, they have learned from their mistakes, and will not apply any more knee jerk or ill thought out measures, which may be populist but not prudent, without prior consultation and thorough research'.

The British Property Federation, which raised concerns at the time that the plan was announced, welcomed the changes. It said that the amendments show that it will not be applied indiscriminately across the UK market which could have had potentially disastrous consequences for commercial investment in residential property.
 
It added that the changes also ensure capital gains tax and an annual charge catch foreign buyers of luxury residential property, while not impinging on genuine business investment in UK residential property.

‘Foreign buyers of luxury residential property for their own enjoyment were always the intended target of the stamp duty changes. It was never designed to deliberately clobber commercial investment in UK housing,’ said Liz Peace, chief executive of the British Property Federation.

‘The devil will be in the detail, but it appears Ministers have listened and sensibly decided to make technical changes that ensure the scope of the measure is not wider than it needs to be,’ she explained.

‘It is, however, unfortunate the confusion has led to an investment hiatus due to the uncertainty. Because of the legislative procedure businesses looking to invest today will have to wait until next summer, or pay the additional 8%,’ she added.

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