Bad news first. Many people will have seen the headlines about a new 7% rate of duty on houses costing over £2million. However, have you fully taken in some of the small print under the banner headlines about wicked tax avoidance by people who buy expensive houses through companies?
First, such purchasers don’t avoid SDLT at all when they buy a property, as companies pay the same as individuals. Also when an existing corporate owner sells the house they don’t avoid anything at that stage – sellers whether individuals or companies have never paid SDLT.
What does happen is that someone who buys share in a company which already owns a house in the UK does avoid the SDLT . But very few people do that deliberately, as for a UK resident there will be significant other tax disadvantages in owning your home through a company because of exposure to Capital Gains Tax (CGT). You don’t qualify for the ‘principal residence’ exemption if a company owns your house. In addition to CGT on the sale by the company you may then have to get the cash out and that is likely to trigger a significant income tax charge on the dividend or other distribution for UK residents. In fact corporate ownership of a private house in the UK can easily result in a form of double taxation.
In practice most people who buy a UK house through a company are not trying to avoid SDLT (they don’t) but may be non-doms wanting to avoid Inheritance Tax (IHT) on their death. Looking ahead there may be other/better ways of achieving IHT protection for assets in the UK owned by ‘non-doms’.
The people who may be in trouble are existing non-dom corporate owners of property in the UK who from 6 April 2013 may find themselves having to pay a 15% annual levy on the property. Ouch! That proposal will be subject to consultation but at this stage no-one is sure how it will work. It seems more focussed on catching people who avoid CGT on properties in an offshore company, which is tough, as if a non-dom is also non-UK resident he won’t be paying CGT anyhow. We will report further as information becomes available.