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UK Tax Experts Criticize Property Tax Avoidance Measures

by Robert Lee,, London

29 January 2013

UK tax experts giving evidence to a House of Lords committee have criticized a new Annual Residential Property Tax, with one warning that the legislation is too weak to succeed in its aims and that an approach comparable to anti-money laundering legislation is required.

The tax, which will be introduced from April 2013, will apply to properties worth more than GBP2m (USD3.2m) and owned by companies and collective investment schemes (called "non-natural persons"), although there will be relief for working farmhouses and exemptions for properties open to the public and for those either owned by or held on behalf of charities. Companies and investment schemes have been used as "corporate envelopes" to avoid Stamp Duty Land Tax (SDLT), and it is hoped that the ARPL, along with an associated new Capital Gains Tax, will put an end to the avoidance. About 90,000 properties are estimated to be affected.

The experts were asked about the new tax by the House of Lords Economics and Finance Bill 2013 Sub-Committee. Richard Murphy, who heads Tax Research UK, explained that the legislation is predicated on knowing the name of the "beneficial owner" of a property, but that it will not be possible to get this information in the case of offshore holdings without stronger legislation making it obligatory to identify ownership in the UK.

Further criticisms were made by Patrick Stevens and Bill Dodwell of the Chartered Institute of Taxation (CIOT), and by Malcolm Gammie QC. Gammie, who gave evidence two days before the other speakers, observed that the tax was designed to protect the boundaries of another tax, and as such was not very satisfactory. He added that there was a concern that although there were exemptions for properties held for legitimate purposes, these exemption will apply only after the legislation's Royal Assent.

Stevens explained that enveloping was less of a problem than arrangements around sub-sale relief, but that HM Revenue and Customs (HMRC) has had only mixed success pursuing cases through the courts. He also advised that some kind of transitional relief should be offered for a year as a "window" to allow owners currently in company arrangements to move into direct ownership, since the legislation may leave owners "stuck" due to the costs of taking a property out.

Meanwhile, Dodwell expressed the view that the government had suspended its tax policy approach in launching the legislation, and he argued that problems with SDLT avoidance were down to past poor enforcement by HMRC that had "got out of control." He agreed with Murphy on the necessity of reporting regulations, and he suggested that an obligation placed on estate agents and conveyancers would pick up most cases.

One peer also raised the issue that the chain of sales through companies had created a distorted land registry, but that this might have repercussions for taxes such as Council Tax. Murphy agreed with one questioner that the land registry and the register of companies were both distorted, but Dodwell judged that any effect would be very small due to the relatively small number of properties involved.

TAGS: capital gains tax (CGT) | Capital Gains | tax | investment | real-estate investment | property tax | tax avoidance | real-estate | United Kingdom | enforcement | legislation | stamp duty | regulation

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