A crackdown on stamp duty and tax avoidance measures in this year’s UK budget could make wealthy non-doms think twice about investing in the London property market.
The UK chancellor, George Osborne, said non-resident companies will now have to pay capital gains tax (CGT) on the sale of housing and also hit companies with 15% stamp duty on the sale of property worth more than £2m ($3.16m).
From now on those who were able to avoid paying stamp duty on the purchase of a home by purchasing shares in a company that holds the property will find this avenue blocked off.
Osborne also announced an annual charge will be levied on such structures and raised the possibility of retrospective tax charges.
Such schemes had appealed to non-doms who were also able to avoid inheritance tax by moving the property into the ownership of a foreign-based entity and therefore out of the remit of UK inheritance law.
Louise Somerset, tax director at RBC Wealth Management said: “It seems logical that anyone making a profit on the sale of a UK asset should pay UK tax. However, the potential knock-on consequences could be huge.
“Advisers will be concerned that this could be the beginning of an unwelcome attack on the acquisition of UK assets by foreign residents.
“It is to be hoped that the plans are very limited in their application.”
Damian Bloom, a partner who specialises in tax and trusts at law firm Berwin Leighton Paisner (BLP), pointed out that many non-doms didn’t want to hold property in their names for reasons other than tax.
He added that the possibility of sidestepping CGT and inheritance tax had contributed to a very attractive regime for non-doms that was now being dismantled.
Michael Wistow, head of tax at BLP, said: “The chancellor is slamming the door in the face of foreign investors coming to the UK before they even book their air ticket.
“His moves to stop people owning residential properties via corporate vehicles, however populist the intent, will have serious perverse consequences far beyond their intended targets.”
Bloom added that the purchase of a property in the UK is the first step for many non-doms who later go on to invest heavily in the country
Tax avoidance measures
The chancellor also announced the intention to introduce a General Anti-Avoidance Rule (GAAR) that would allow revenue officials to deem certain tax avoidance schemes impermissible if they were judged to be abusive.
Private banking commentators welcomed the idea behind the move, but warned of potential unintended consequences.
Christine Ross, group head of wealth planning at SGPB Hambros, said: “Our hope is that it does not inadvertently catch reasonable, non-aggressive, tax planning.”
With a consultation to be held before any details are confirmed, many warn that the devil will be in the detail.
Katharine Arthur, tax partner at MHA MacIntyre Hudson, said: “An advisory panel independent of HMRC must be appointed to determine what is abusive and what is not.”
Others urged the government to allow companies to submit their tax plans to HMRC for pre-approval, rather than face the risk of having them retrospectively rejected.
BLP’s Michael Wistow said the plan risked damaging certainty in the UK legal system, and political pressure to toughen the plans could later prove irresistible.