Mansion Tax Lite: Killer Arguments Against LVT, Not (303)

1) It is quite true that there are certain taxes relating to UK land and buildings which can be avoided or reduced if they are registered in the name of an offshore company and certain other conditions are met, primarily Inheritance Tax, Capital Gains Tax and Stamp Duty Land Tax. To some extent, registering UK land and buildings in the name of an offshore company is also handy for money-launderers and other ne'er do wells, but let's gloss over that.

2) This does not really apply to income tax or corporation tax. The liability on "investment properties" can (in some circumstances) be reduced or eliminated if land and buildings are held by an offshore company or a pension fund, which applies in particular to commercial land and buildings. In other circumstances, a non-domicile can generate an income tax liability out of nowhere if he transfers ownership of his main residence into an offshore company. And as far as arm's length rented land and buildings are concerned, it doesn't make much difference, income tax (or flat rate 20% corporation tax) is payable, even if they are owned by a non-UK person.

3) None of this applies to annual recurring taxes on land and buildings (Council Tax or Business Rates) which are payable at exactly the same rate whoever the registered owner is, and collection rates for these two taxes are the highest of all major UK taxes.

4) In an outbreak of common sense, the UK government has now decided that rather than re-write the whole legislation relating to IHT, CGT and SDLT, they will take three measures regarding "non-natural persons" ("NNP") who own"high-value residential property" ("HVRP", meaning homes with a market value of £2 million or more):

a) From April 2012, if an NNP acquires HVRP, the SDLT is 15%. You would expect receipts to plummet as a result, but I read recently that the Treasury were pleasantly surprised to see that more SDLT is being collected than ever (I can't find the article at the moment). This does not apply to HVRP already owned by NNPs.

b) From April 2013, capital gains made by an NNP on high-value property will be liable to CGT at the normal rate of 28%. I wouldn't expect this to increase tax revenues, because the revenue-maximising rate for CGT is only about 10%, but we will see.

c) From April 2013, HVRP is liable to a "Mansion Tax Lite" ("MTL"), which is £15,000 per annum for a HVRP in the £2 million to £5 million band, going up to £140,000 per annum for a HVRP worth more than £20 million. It remains to be seen how much revenue this will raise, as there are fewer than 100,000 such homes, of which only half (?) are owned by NNPs. And the idea is not really to collect more tax than if it were all owned by UK-resident and domiciled individuals, it is to try and reduce the "tax gap" caused by people avoiding IHT, CGT and SDLT.

d) If somebody uses an NNP to own HVRP, he can easily avoid the MTL by transferring ownership back into his own name. But this will almost certainly increase the amount of IHT that will be payable and probably increase the amount of SDLT payable (future sales will be liable in full rather than being avoided completely by selling the NNP rather than the underlying HVRP). It might reduce the amount of CGT payable (CGT is not payable on an individual's main residence). It is a very tricky calculation deciding whether it is better to take the MTL on the chin or to take your chances with IHT, SDLT and so on. In many cases, people will be better off just paying the MTL each year and so the correct tax planning is "do nothing".
-----------------------------------------
So much to the actual background and hard facts.

Let us now turn to two of the supposed "killer arguments" which go something like this:

A. "Wealthy individuals will avoid Land Value Tax by registering land and buildings in the name of an offshore company."

We already know that you cannot avoid annual recurring taxes like Council Tax or Business Rates by putting land and buildings into an offshore company, so the argument is fatuous anyway as it flies in the face of known facts.

If the "killer argument" is correct, then the receipts from any annual tax payable only by NNPs, primarily offshore companies will always be precisely £nil, i.e. according to their non-logic, an offshore company can avoid a tax payable by offshore companies by re-registering the land and buildings in the name of, er, an offshore company.

So we will see, won't we? Given the political will, I reckon that the collection rates from this tax will be exactly 100% (apart from a bit of arguing about precise valuations at the lower and upper limits of the bands, which serves them right for making the bands so wide).

There is sometimes little point in chasing small Council Tax of a few hundred pounds, but HM Land Registry know exactly who is the registered owner of what, and if they don't know, then the Council Tax people know who the occupants are. But with at least £14,000 up for grabs from each HVRP each and every year, it is well worth HM Revenue & Customs' time chasing up non-payment and starting a court action etc.

B. "If we have LVT, then all the wealthy people will sell up and go abroad."

Again, this remains to be seen, doesn't it?

People who can afford to snap up houses for £2 million and have reason to register it in the name of an offshore company (to avoid IHT or minimise future SDLT liabilities, to assist with money laundering or just in order to keep their true level of personal wealth as secret as possible) are almost certainly the sort of people willing and able to cough up £14,000 a year to maintain the status quo, this tax is still a lot less than £30,000 or £50,000 a year per-person "non-dom levy" which several thousand of the very richest ones are paying.