On 21st March, the Chancellor of the Exchequer announced the UK Government’s 2012 budget, which included a range of reforms to the tax system.

As with most Budgets, there was good and bad news for residential property: various measures were announced to attempt to revitalise the UK housing market, and the Chancellor backed up his pre-budget promise to crack down on tax avoidance schemes, targeting in particular the acquisition of residential property via corporate vehicles. All of these changes will have an impact on UK homeowners whether resident in UK, Gibraltar or further afield. The following overview summarises the major changes.

UK budgets can inspire politicians here in Gibraltar too, and its Gibraltar’s budget time at the end of June.

7% stamp duty

A new 7% rate of Stamp Duty Land Tax (SDLT) has been introduced for residential properties sold for over £2 million, with immediate effect. This tax will also affect individual investors as it applies to single or linked purchases of up to five residential properties by individuals or companies, where the aggregate price paid exceeds £2 million. The previous top rate of 5% for properties sold between £1 million and £2 million remains. Meanwhile, in Spain, the highest rate of stamp duty on property purchases recently increased to 10%. Gibraltar’s top rate of 3.5% is beginning to look rather attractive!

15% stamp duty for corporate purchases

A new 15% Stamp Duty has been applied, with immediate effect to residential properties purchased for £2 million or more via ‘non-natural persons’, that is, companies and collective investment schemes like unit trusts, or partnerships which have a non-natural person as a member. This is designed to eradicate the common loophole whereby people try to avoid stamp duty by using a company to buy a residential property. The home is then sold on as shares in the company in a bid to sidestep the duty normally paid. Although this excessive rate of Stamp Duty might achieve its objective, it also seems to unfairly attack those who may prefer to buy a residential property via a company, a pension or a trust for legitimate reasons. Having said that, of the 2,834 homes sold in England and Scotland in the last two years for more than £2m, 2,059 were in London, and many of these will have been purchased by non-UK residents. So does anyone feel sorry for those having to pay 15% duty? Probably not. Would we want this in Gibraltar? I think not, because as far as I am aware, we do not have a problem to solve regarding attempts at avoiding stamp duty on high value residential purchases in Gibraltar.

Stamp duty holiday

The stamp duty holiday that was introduced for first time buyers in 2010 ended on 23rd March as the UK Government said it had been ineffective in helping people to buy. Gibraltar’s nil rate band of up to £200,000 looks generous compared to the UK’s £125,000 nil rate band, although property prices in Gibraltar are significantly higher than most parts of the UK.

New buy guarantee scheme

In place of the stamp duty holiday, the Government launched the New Buy Guarantee scheme on 12th March 2012, which it hopes will be better at getting people on to the housing ladder. The scheme will see the UK Government and major house builders guaranteeing part of the loan from banks to first-time buyers, allowing people to buy a new home with just 5% deposit. The Gibraltar Government might watch and see how successful such a scheme is, especially considering the GSLP / Liberal pledge to expand the role of the Gibraltar Savings Bank.

Inheritance tax

From 6th April 2012, a lower rate of IHT of 36% (compared to the normal 40%) will be available if 10% or more of a deceased person’s net estate is left to charity. No such issue in Gibraltar. There is no inheritance tax.

Other measures currently in consultation

The UK Government intends to extend Capital Gains Tax liability (CGT), from April 2013, to UK residential properties (and shares or interests in residential property) held by non-UK resident non-natural persons. This is a significant step as currently non-UK residents (companies or individuals) can own residential property in the UK and not suffer any UK CGT on the ultimate disposal. The lack of UK CGT on property for non-UK residents has made the UK residential property market a popular place in which to invest, especially for those based in jurisdictions where there is no CGT, for example, Gibraltar. There will be (or if not, should be) a number of Gibraltar based investors (individuals, funds, companies etc) who will be watching this consultation exercise closely.

In addition to increasing stamp duty to 15% for the purchase of UK residential properties above £2m by ‘non-natural persons’, the UK Government is also consulting on the introduction of an annual levy of such properties above £2m held within corporate vehicles from April 2013. They really do want to identify the owners of these properties!

Finally, the Statutory Residence Test, whereby greater certainty is attributed to the definition of ordinary residency from a UK perspective, which was due to be enacted 6 April 2012 has been delayed to 6 April 2013 to allow for a greater degree of consultation. This delay was announced at the end of 2011 by HMRC who stated that a further announcement would follow around the time of the 2012 budget. Now even this announcement has been delayed to “sometime after the budget 2012”. This ruling will impact many UK residents who have relocated to, or are considering relocating to, Gibraltar for tax reasons as it will determine the rules by which they can return to the UK for visits, holidays, and work reasons.

So watch this space…….