Finance Bill – Houses held by companies

An important feature of the Budget was an attack on what was regarded as tax avoidance, achieved by arranging for expensive houses to be held inside companies. This was seen as leading to avoidance of Stamp Duty Land Tax, by the house being able, effectively, to be sold by means of a sale of the shares in the company. The sale of shares would of course only attract a modest stamp duty charge, or perhaps no charge at all if the house was held by an overseas company or entity. Part of the attack on the holding of properties in this way was to be an annual tax, to be levied on companies which own one or more dwelling houses worth £2m or more. The details of the new “Annual Tax on Enveloped Dwellings” are contained in Part 3 of the Finance Bill. At first sight, it might seem that these provisions will be of little interest to trustees or personal representatives. Nevertheless, they maybe indirectly affected, by holding shares in companies which own dwelling houses, or because interests held by them are aggregated with other interests held in companies under what will be wide ranging “connected persons” provisions. One of the features of the legislation is that it will not just be aimed at arrangements recently entered into. It will affect cases when houses have been held inside companies perhaps as a result of arrangements made for tax reasons many years ago. In many cases the arrangements have only been left in place, because of the heavy tax costs that will be incurred on extracting the house from the company. This will inevitably involve the company disposing of the house, and realising a chargeable gain. The “private residence exemption” is, of course only available to human beings, and trustees, not to corporate owners of residential property. Then on top of the persons (human or trustee) in whom the property is vested will either be taxed on what will effectively be a dividend, or themselves suffer a CGT charge by reason of the shares being disposed on in a liquidation.