Section 65, Schedule 25: Charge on Certain High Value Disposals by Companies Etc
Summary
1.Section 65 introduces Schedule 25 which introduces a charge to capital gains tax (CGT) on both UK and non-UK resident non-natural persons (NNPs) in respect of gains accruing on the disposal of interests in high value residential property that are the subject of the annual tax on enveloped dwellings (ATED). Broadly, for the purposes of this legislation NNPs will be companies and certain collective investment schemes. Companies that are within the charge to UK corporation tax will be liable to this CGT charge in respect of such disposals rather than corporation tax. The charge will apply to gains on disposals on or after 6 April 2013. Increases (and decreases) in the value of property before then are outside the new charge but remain subject to the existing corporation tax rules on capital gains. This legislation should be read alongside the legislation introducing ATED.
Details of the Schedule
2.Part 1 of the Schedule makes changes to the Taxation of Chargeable Gains Act 1992 (TCGA 1992). Paragraph 1 introduces the changes.
3.Paragraph 2 inserts a new subsection (2A) into section 1 of TCGA 1992 to charge companies to capital gains tax (CGT), and not corporation tax, to the extent that their gains are chargeable under section 2B (see paragraphs 8 to 15 below). Paragraph 2 also makes consequential amendments to section 1(2) and 1(3).
4.Paragraph 3 inserts new subsection (7A) into section 2 of TCGA 1992. With certain exceptions, section 2 restricts CGT to persons who are resident or ordinarily resident in the UK in the tax year in which gains arise, and sets out how losses are to be set off against gains in arriving at the net amount on which CGT is charged. New subsection (7A) disapplies these rules in relation to gains and losses in the tax year 2013-14 or later that are ‘ATED-related’ (see paragraph 35 and 45 to 51 below).
5.Paragraph 4 inserts new sections 2B, 2C, 2D, 2E and 2F into TCGA 1992.
6.Subsection (1) of new section 2B provides that a person (other than an excluded person) (“P”) is chargeable to CGT in respect of ‘ATED-related chargeable gains’ accruing to P in a tax year on a ‘relevant high value disposal’ (as defined at new section 2C, see paragraphs 16 to 17 below). ATED-related chargeable gains are computed in accordance with new section 57A and Schedule 4ZZA (see paragraphs 35 and 45 to 51 below). Excluded persons (defined at section 2B(2)) are exempt from the charge.
7.Subsection (2) of section 2B explains which persons are ‘excluded’, and in what circumstances. Individuals, trustees and personal representatives are excluded persons if they are a member of a partnership and the gain accrues on a disposal of a partnership asset, or if they are a participant in a ‘relevant collective investment scheme’ and the gain accrues on property held for the purposes of the scheme. ‘Relevant collective investment scheme’ is defined at subsection (10).
8.Where individuals, trustees and personal representatives hold property directly – not via a partnership or through a collective investment scheme – they are also outside the scope of charge under section 2B. They will not be chargeable to ATED and their gains will therefore not be “ATED-related”.
9.Subsection (3) of section 2B provides that ‘ring-fenced ATED-related allowable losses’ are deducted from the total ATED-related chargeable gains in arriving at the gains chargeable to CGT for a tax year. ‘Ring-fenced ATED-related allowable losses’ are defined at section 2B(10) and are also computed in accordance with new section 57A and Schedule 4ZZA.
10.Subsections (4) to (7) of section 2B ensure that ATED-related allowable losses can be used only once and are either set off against ATED-related chargeable gains in the same tax year or, when the losses exceed the gains for the year, the unused losses are carried forward and set off against ATED-related chargeable gains in later years.
11.Subsection (1) of new section 2C defines a “relevant high value disposal” as one that meets conditions A to D. These conditions are set out in subsections (2) to (5) and particular terms used are defined in subsection (6).
12.Subsection (7) of section 2C provides that where a period before 1 April 2013 is included in ‘the relevant ownership period’ the question whether P (or the responsible partners or the manager of the collective investment scheme in question) was chargeable to ATED is to be decided on the basis that ATED and its associated reliefs came into force on 31 March 1982. The effect is to treat days before 1 April 2013 as if they were subject to ATED (or relieved from ATED by one of the reliefs available) even though the tax was not in force at that time.
13.New section 2D defines “the threshold amount”. Subsections (1) and (2) of section 2D hold that the threshold amount is £2 million when the disposal is not a part disposal and P has not made any ‘relevant related disposals’ (as defined in subsection (7), see below). But the £2 million figure is reduced where either subsection (3), or subsection (5), or both apply, see below.
14.Subsections (3) and (4) of section 2D apply where the disposal in question is either a disposal of part of the chargeable interest, or where there is one or more “relevant related disposals”. In these cases the threshold amount is the fraction C/TMV of £2 million, with C being the consideration for the disposal and TMV the total market value of a notional asset consisting of the disposed of interest, any undisposed part of the chargeable interest and any chargeable interest which was the subject of a ‘relevant related disposal’ (see below) or would have been if P had disposed of it at that time. The adjusted amount produced by this formula is subject to further restriction where subsection (5) applies.
15.Subsection (5) and (6) of section 2D apply where the disposal is of the whole of a person’s fractional share either in the whole of an interest or in part of an interest (that is, where the interest is jointly owned, for instance by a partnership). In these cases the £2 million amount is reduced by reference to the person’s fractional share.
16.For example, if a person has a 75% share in the chargeable interest and subsection (3) does not apply, the £2 million figure is reduced to £1.5 million. If subsection (3) also applies, the £1.5 million figure is then reduced to the C/TMV fraction of that amount.
17.Subsection (7) of section 2D defines ‘relevant related disposal’ as any chargeable disposal made in the 6 years ending with the date of the current disposal which was a disposal of part of the same single-dwelling interest as the one that is the subject of the current disposal, or a disposal of the whole or part of a different single-dwelling interest in the same dwelling. Disposals before 6 April 2013 are excluded.
18.New section 2E of section 2D restricts the amount of a loss which is an ATED-related loss in some cases where the disposal meets all the conditions for it to be a relevant high value disposal except that the consideration for the disposal is less than the threshold amount for that disposal. Where the allowable deductions exceed that threshold amount, the ATED-related loss is restricted to the amount which it would have been if the consideration for the disposal had been £1 more than the threshold amount. This does not affect the amount of any loss that is not ATED-related, or the amount of any gain (whether it is ATED-related gain or not).
19.New section 2F reduces the amount of an ATED-related gain in cases where the CGT chargeable on the full gain could leave the vendor worse off than they would have been if they had sold their property for less than the threshold amount.
20.Subsection (2) of section 2F provides a ‘tapering relief’ so that the chargeable amount is the lower of (a) the full ATED-related gain and (b) 5/3 times the difference between the consideration for the disposal and the threshold amount for that disposal.
21.Subsections (3) and (4) of section 2F provide that, where only a proportion of a gain (the ‘relevant fraction’) is an ATED-related gain chargeable under section 2B, the amount excluded from charge under section 2B by subsection (2) is reduced by the same proportion.
22.For example, suppose that the consideration for the disposal is £2.6 million and threshold amount is £2 million. 5/3 of the difference between these figures is £1 million. If the whole of the gain on the disposal is ATED-related, section 2F(1) applies and any gain chargeable to CGT under section 2B is capped at £1 million. If only part of the gain is ATED-related, say 4/10, the ATED-related gain chargeable to CGT under section 2B is capped at 4/10 × £1 million = £400,000. The gain that is not ATED-related is unaffected.
23.Subsection (5) of section 2F confirms that subsections (1) to (4) do not affect the amount of an allowable loss accruing on the disposal of an asset, or the amount of any loss (whether it is an ATED-related loss or not).
24.Paragraph 5 inserts new subsection (3A) into section 4 of TCGA 1992. Section 4(3A) sets the rate of CGT on gains chargeable under section 2B (see paragraphs 8-15 above) at 28%.
25.Paragraph 6 inserts new subsection (4A) into section 8 of TCGA 1992. Section 8 provides certain rules for taxing gains, and relieving losses, of companies chargeable to corporation tax. Section 8(4A) prevents these rules from applying to ATED-related chargeable gains and allowable losses that are subject to the new CGT charge in the tax year 2013-14 or later.
26.Paragraph 7 inserts new subsection (1A) into section 13 of TCGA 1992. Section 13 is an anti-avoidance provision that attributes chargeable gains of certain types of non-UK resident company to some participators in the company. Section 13(1A) prevents ATED-related chargeable gains being attributed to participators under section 13. The company itself will be chargeable to CGT on its ATED-related chargeable gains.
27.Paragraph 8 amends section 16 of TCGA 1992 to allow a loss that accrues to a person resident outside the UK to be an allowable loss where a gain would have been chargeable under section 2B if a gain had accrued instead of a loss.
28.Paragraph 9 inserts new section 57A into TCGA 1992. Section 57A(1) introduces new Schedule 4ZZA, which makes provision about the computation of gains and losses on relevant high value disposals, including whether a gain or loss accruing on the disposal is ATED-related (see paragraphs 45 to 51 below). Section 57A(2) provides that if the computation under Schedule 4ZZA produces no ATED-related gain or loss then the gain or loss is to be computed ignoring the Schedule.
29.Paragraph 10 inserts new section 100A into TCGA 1992. Section 100A exempts from CGT gains which accrue to certain EEA UCITS on disposals of high value residential property. The EEA UCITS must be neither an open-ended investment company nor a unit trust scheme. The relevant terms are defined in subsection (2).
30.Subsection (2) of new section 100A defines three terms used in subsection (1). “EEA UCITS”, “unit trust scheme”, and “open-ended investment company” each have the same meaning as in Part 17 of the Financial Services and Markets Act 2000.
31.Paragraph 11 inserts new subsections (3ZA) and (3ZB) into section 161 of TCGA 1992. Section 161 applies where a trader either puts an asset they already own into the trade as trading stock, or where they take an asset out of trading stock. The new subsections (3ZA) and (3ZB) modify the rules in section 161 where a trader puts a property into trading stock.
32.Section 161(3) permits a trader to elect for the gain or loss that is latent in the asset they have taken into trading stock to be ‘rolled-over’ into the cost of the asset when it is held as trading stock. Subsection (3ZA) prevents the trader making that election in cases where any of that gain or loss would be ATED-related. Instead they may make an election for subsection (3ZB) to apply.
33.Subsection (3ZB) of section 161 provides for the ATED-related gain or loss latent in the asset when it is appropriated to trading stock to accrue and be chargeable to (or allowable for) CGT under section 2B at that time, and for the part of the gain or loss which is not ATED-related not to be chargeable (or allowable), but to be ‘rolled-over’ into the cost of the asset when held as trading stock.
34.Paragraph 12 inserts new paragraph (ba) into section 171(2) of TCGA 1992. Section 171 provides the general rule that assets transferred between companies that are in the same group of companies are treated as transferring the assets at a ‘no gain/no loss’ value. The rule is subject to various conditions and exceptions. Paragraph (ba) adds the new exception that ‘no gain/no loss’ treatment will not apply to a disposal where (as a result of not applying no gain/no loss treatment) the disposal gives rise to a gain or loss that is ATED-related.
35.Paragraph 13 inserts new section 187A into TCGA 1992. Section 187A modifies the operation of section 185, which produces a charge to tax on gains latent in assets when a company ceases to be resident in the UK for tax purposes. Section 185 treats the company as disposing of all its assets immediately before the time of emigration from the UK, thus crystallising latent gains and losses. Section 187A provides that, where the deemed disposal under section 185 generates an ATED-related gain chargeable to CGT under section 2B (or an ATED-related loss allowable under section 2B) the gain is not charged immediately (and a loss is not immediately available for set off). Instead the ATED-related gain or loss is treated as coming into charge (or being allowable) at a later time when the company disposes of the asset. Section 187A does not affect the treatment of any gain or loss produced under section 185 which is not ATED-related.
36.Paragraph 14 extends the scope of section 271 of TCGA 1992 so that gains which accrue on the disposal of investments held for the purposes of ‘overseas pension schemes’ (within the meaning given by section 150(7) of the Finance Act 2004) are not chargeable gains.
37.Paragraph 15 inserts into section 288 of TCGA 1992 definitions of the expressions ‘ATED-related’, which is to be construed in accordance with section 57A and Schedule 4ZZA, and ‘relevant high value disposal’, which has the meaning given by section 2C.
38.Paragraph 16 inserts new Schedule 4ZZA into TCGA 1992.
39.Paragraph 1 of new Schedule 4ZZA holds that the Schedule applies to determine the amount of the gain or loss on a relevant high value disposal that is ATED-related or not ATED-related.
40.Paragraphs 2 to 4 provide rules for computing the ATED-related gain where the chargeable interest disposed of was acquired before 6 April 2013 and disposed of on or after that date and no election has been made under paragraph 5 to Schedule 4ZZA (see below). The computational steps in relation to gains are as follows (for losses see paragraph 48 below).
A ‘notional post-April 2013’ gain is computed on the assumption that the interest was acquired at its market value on 5 April 2013. The notional post-April 2013 gain is computed as if P, the person making the disposal, were chargeable to capital gains tax, not corporation tax, on chargeable gains. The effect of this is that indexation allowance is not allowed (but see (d) below).
A ‘notional pre-April 2013’ gain is computed on the assumption that the interest was disposed of at its market value on 5 April 2013. The notional pre-April 2013 gain is computed on the basis that P is chargeable to corporation tax. The effect of this is to include a deduction for indexation allowance (IA) in arriving at the notional pre-April 2013 gain, if IA would have been due under the normal corporation tax rules.
The ‘notional post-April 2013 gain’ is split into ATED-related and non ATED-related parts. The ATED-related part is the fraction CD/TD of the notional post-April 2013 gain, where CD is the total days chargeable to ATED (and not relieved from that tax) from 6 April 2013 to the day of disposal and TD is the total days from 6 April 2013 up to and including the day before the day of the disposal.
The remainder of the notional post April 2013 gain is not (or non) ATED-related. This non ATED-related gain is reduced by an amount of ‘notional indexation allowance’. The notional indexation allowance available is equal to the IA that would have been due if P were chargeable to corporation tax on the actual disposal and Schedule 4ZZA did not apply to compute the gain, less the amount of IA given in computing the notional pre-April 2013 gain (see (b) above), multiplied by the fraction (TD-CD)/TD.
The total gain on the disposal that is non ATED-related is the sum of the gain under (b), plus the gain under (d) above.
41.The computational steps are essentially the same for losses, but no notional indexation allowance is available to increase any non ATED-related loss (because indexation allowance under the normal rules cannot create or increase a loss).
42.Paragraph 5 allows the person chargeable to CGT (P) to elect that paragraphs 2 to 4 do not apply to a disposal of a chargeable interest it held on 5 April 2013. The election is irrevocable and must be made in a capital gains tax return (or an amendment to the return) for the tax year in which P disposes of the interest, or for the first tax year (from 2013-14 onwards) in which P makes a part disposal of the interest. An election covers only the chargeable interest in respect of which it is made.
43.Paragraph 6 provides computational rules where the chargeable interest is acquired after 5 April 2013, or where P acquired the interest before that date but elects under paragraph 5 for paragraphs 2 to 4 not to apply. The rules are broadly as outlined at paragraph 47(a), (c) and (d) (and paragraph 48, in the case of losses) above. Where P has elected under paragraph 5 for this paragraph 6 to apply, the days which are chargeable to annual tax on enveloped dwellings (CD) are calculated as if that tax were in force throughout the period of ownership, including periods before 2013-14 and TD is the total number of days in the period of ownership since acquisition or since 31 March 1982, whichever is the later.
44.Paragraph 7 provides for any adjustments necessary to give effect to a change in liability to tax caused by a change in the number of days in a period which are chargeable to ATED, after a claim for relief from ATED is made or altered.
45.Paragraph 17 inserts new paragraph 10A into Schedule 7A to TCGA 1992. Schedule 7A restricts the extent to which a company’s losses may be set off against gains where the losses arose before the company became a member of a group of companies. Where an asset has been appropriated to trading stock and there has been an election under section 161(3ZA) (see paragraphs 38 - 40 above) to ‘roll-over’ a loss which is not ATED-related, then if the company becomes a member of a group of companies before the asset is sold in the course of the trade the effects of the election will be reversed. The cost of the asset as trading stock will be its market value at the time it was appropriated (without any ‘roll-over’) and the loss which is not ATED-related will be allowable at the time of the appropriation, but will be subject to restriction under Schedule 7A.
46.Part 2 of the Schedule amends other Acts. Paragraph 18 inserts new subsection (2A) into section 2 of the Corporation Tax Act 2009. Section 2(2A) excludes ATED-related gains (chargeable to CGT under section 2B) from the meaning of chargeable gains for corporation tax purposes. Paragraph 19 amends section 32 of the Corporation Tax Act 2010 to provide that, for determining whether a company is chargeable to corporation tax at the small profits rates (or is entitled to marginal relief) for the accounting period in question, its ‘adjusted total taxable profits’ are taken as the amount they would have been if no part of its chargeable gains and allowable losses for the period were chargeable to (or relievable for) CGT under section 2B of TCGA 1992 instead of to (or for) corporation tax.
47.Part 3 of the Schedule makes provision for commencement.
Background
48.In broad terms, capital gains tax (CGT) is charged on chargeable gains accruing to a person on the disposal of an asset, after deducting any allowable losses, if they are resident in the United Kingdom in the tax year in which the disposal takes place.
49.Companies within the charge to corporation tax have been excluded from CGT and are instead charged to corporation tax on their chargeable gains.
50.The Government announced the introduction of the annual tax on enveloped dwellings (ATED) at Budget 2012, which introduces an annual tax on high value residential UK property owned by certain non-natural persons (NNPs). Legislation for the ATED is in Part 3 of the Finance Act 2013.
51.This extension of the scope of capital gains tax supports the ATED by taxing gains on disposals of high value residential UK property by certain non-natural persons within the scope of the ATED, principally companies. The charge applies to both UK and non-UK resident NNPs in respect of disposals made on or after 6 April 2013. A form of rebasing will apply to ensure that pre 6 April 2013 gains remain outside the scope of the new CGT charge. Gains and losses within the scope of the new CGT charge will be excluded from the scope of corporation tax.
52.CGT will be charged at a rate of 28% (the rate applicable to trustees and individuals who pay income tax at the higher rate 40%), on disposals of UK residential property where the consideration exceeds £2m. The consideration threshold will be reduced proportionately where the person owns only part of the property or disposes of part of it, to ensure that the charge cannot be avoided though fragmentation.
