Annual residential property tax (ARPT): draft Finance Bill 2013

Practical Law UK Legal Update 1-523-2198 (Approx. 19 pages)

Annual residential property tax (ARPT): draft Finance Bill 2013

by PLC Tax

Background

On 21 March 2012, the government announced as part of its Budget, the immediate introduction of a new 15% SDLT rate for UK residential property acquisitions by "non-natural persons" (NNPs) if the consideration exceeds £2 million. For a detailed analysis of the implementing legislation, see Legal update, SDLT legislation: the 15% charge on enveloping high-value residential property).

Also in the 2012 Budget, the government announced that it would consult on introducing an annual charge on residential properties over £2 million owned by certain NNPs with a view to including the measures in the Finance Bill 2013 (see Legal update, 2012 Budget: key business tax announcements: Annual charge for high value residential properties).

In addition, the government announced that it would consult on extending, from 6 April 2013, the scope of CGT to cover gains arising on disposals by non-UK resident NNPs of UK residential property and shares or interests in UK residential property (see Legal update, 2012 Budget: key business tax announcements: CGT: disposals of residential property by non-resident non-natural persons).

On 31 May 2012, the government published a consultation document setting out its proposals for the:

Introduction of an annual charge on high-value UK residential properties (HVRPs) owned by certain NNPs.
Extension of CGT to disposals of HVRPs by certain NNPs.

The government's aim in introducing these measures and the new SDLT enveloping charge is to counter avoidance by the economic owners of HVRPs, ensuring that they pay their "fair share of tax". As such, all three measures will be aligned so that, so far as possible, they target similar activities. For more information on the proposals set out in the consultation, see Legal update, Enveloping high-value residential property: consultation on annual charge and extending CGT to non-residents.

Draft ARPT legislation and response document

On 11 December 2012, the government published a summary of responses to the consultation (response document) along with draft legislation, for inclusion in the Finance Bill 2013, introducing a new tax called "annual residential property tax" (ARPT).

Legislation will also be introduced in the Finance Bill 2013 to extend CGT to certain non-UK resident NNPs disposing of HVRPs on or after 6 April 2013. However, the draft legislation will not be published until January 2013 (see Legal update, Draft Finance Bill 2013 legislation: key business tax measures: CGT: extending the charge to disposals of high-value residential property by certain non-UK residents).

This update covers the draft ARPT legislation and the response document insofar as it relates to ARPT. In due course, we will publish a separate update on the draft CGT legislation and the response document insofar as it relates to CGT.

The draft ARPT legislation is contained in 60 clauses and two schedules. References to clause numbers and paragraphs of schedules are references to this draft legislation.

Scope of ARPT

ARPT is charged in respect of each chargeable period (see Chargeable period). An ARPT charge arises if on at least one day in the chargeable period a company, partnership, or collective investment scheme (CIS) meets the ownership condition (see Ownership condition) in relation to a "single-dwelling interest" (see Single-dwelling interest) with a taxable value (see Taxable value) exceeding £2 million (clause 1(2)).

Single-dwelling interest

A chargeable interest exclusively in or over land consisting of a single dwelling is a single-dwelling interest (clause 10(2)).

If a person's chargeable interest comprises two or more single dwellings, the person is treated as owning a separate chargeable interest for each dwelling and, therefore, separate single-dwelling interests (clause 10(3)).

If a person's chargeable interest comprises one or more single dwellings and non-residential land (that is, land that is not a dwelling or part of a dwelling), the person is treated as owning a separate chargeable interest for each dwelling and a separate chargeable interest for the non-residential land (clause 10(4) and (7)(a)).

The definition of "dwelling" (see Dwelling) is constructed around the SDLT definition (see Practice note, SDLT and residential property: the top SDLT rate: What is residential property? and Extract from HMRC Statement of Practice 1/04 – Stamp Duty Land Tax – Disadvantaged Area Relief) so that a building or part of a building is a dwelling if it is used or suitable for use as a dwelling. However, the SDLT rule in section 116(7) of the Finance Act 2003, which treats the acquisition of six or more dwellings as non-residential, has not been imported because of a fear that it might provide an avoidance opportunity. Instead, if there is a genuine business purpose in holding the dwellings in an NNP, one or more of the specific reliefs must be relied on to escape an ARPT charge (see Reliefs).

Taxable value

The taxable value of a single-dwelling interest on any day ("relevant day") is its market value at the end of the last valuation date (clause 6(1)).

Valuation date

Each of the following is a valuation date in respect of any single-dwelling interest:

1 April 2012.
1 April 2017 and, thereafter, each 1 April at five-year intervals (1 April 2022 and so on).
The effective date of any acquisition (as the case may be):
- by the company of a chargeable interest in or over the single-dwelling;
- resulting in the chargeable interest in or over the single-dwelling interest becoming partnership property; and
- made for the purposes of the CIS, of a chargeable interest in or over the single-dwelling.
The effective date of any disposal of part of the single-dwelling interest (including the grant of a chargeable interest out of the single-dwelling interest, but not the grant of an option).

(Clause 6(2)-(7).)

There are particular rules specifying a valuation date for new builds, conversions and damaged buildings (see Special situations).

Ownership condition

The ownership condition is formulated in a different way for a company, partnership or CIS to reflect the different nature of these NNPs. If a chargeable interest is jointly beneficially owned (joint tenants or tenants in common), it remains a single chargeable interest (each joint owner is not regarded as owning a separate chargeable interest representing its s share of the whole) (clause 9(2).)

Company

A company meets the ownership condition if it is beneficially entitled to the single-dwelling interest otherwise than as a member of a partnership (clause 1(4)). If a company is a joint owner (joint tenant or tenant in common) of the single-dwelling interest, the ownership condition is met for the whole chargeable interest. For example, if a company jointly owns a HVRP with another person, an ARPT charge will arise even if the company's share in the HVRP is worth less than £2 million. This complements (and is consistent with) the anti-avoidance measures that apply if different interests in the same chargeable interest are held by the same person or by connected persons (see Aggregation and fragmentation of interests).

Partnerships

A partnership meets the ownership condition if a corporate member of the partnership is beneficially entitled to the single-dwelling interest as a member of the partnership (clause 1(5)). Therefore, if a HVRP is partnership property, an ARPT will arise if there is a corporate member of the partnership. On the other hand, for example, if two limited liability partnerships (LLPs) are in partnership and a HVRP is partnership property, the ownership condition will not be met unless (arguably) one or both of the LLPs has a corporate member.

Collective investment scheme

A CIS meets the ownership condition if the single-dwelling interest is held for the purposes of the scheme (clause 1(6)).

Aggregation and fragmentation of interests

If a company owns, or a CIS holds for the purposes of the scheme, two or more single-dwelling interests in the same dwelling (for example, the freehold and a leasehold), the separate interests are treated as a single-dwelling interest (the taxable value of which is their aggregate value) (clause 11(1) and (2)).

If a company ("A") owns a single-dwelling interest (for example, the freehold) and another person ("B"), who is connected with A, owns a different single-dwelling interest in the same dwelling (for example, a leasehold):

A is treated as owning B's single-dwelling interest (as well as A's single-dwelling interest).
If B is a company, B is treated as owning A's single-dwelling interest (as well as B's single-dwelling interest).

(Clause 12(1).)

There are similar provisions that apply if a unit trust scheme (within section 237(1) of the Financial Services and Markets Act 2000) holds a single-dwelling interest and another person (or unit trust scheme), who is connected with the unit trust scheme, owns (or holds for the purpose of the other unit trust scheme) a different single-dwelling interest in the same dwelling (clause 12(2) and (3)).

However, the response document states that de minimis rules will be introduced so that if the value of the NNP’s interest is relatively small (less than both £500,000 and 5% of the value of the individual’s interest, or less than £100,000), the separate interests will not be aggregated. For example, if a company owning a freehold grants a 99-year lease of a dwelling at a peppercorn rent to a connected person for a premium, the taxable values of the separate interests in the dwelling will not be aggregated if the company's freehold interest is relatively small.

ARPT in respect of a single-dwelling interest is charged only once for any chargeable day (clause 7). Therefore, if these provisions trigger a double tax charge, clause 7 ensures that only one ARPT charge arises. However, all chargeable persons (in respect of a chargeable day) are jointly and severally liable for the tax referable to that day (clause 12(6)). The legislation does not provide for who has primary liability so, presumably, the chargeable persons must agree on the incidence of the tax.

Calculating ARPT

Assuming that there is a company, partnership or CIS within the scope of ARPT, the amount of that charge depends on the following factors:

The taxable value (see Taxable value) of the single-dwelling interest on the relevant days.
The number of days in the chargeable period (see Chargeable period) that the chargeable person is within the charge in respect of the single-dwelling interest.
The adjusted chargeable amount (see Adjusted chargeable amount).

Chargeable period

The first chargeable period for ARPT begins on 1 April 2013 and ends on 31 March 2014. Each subsequent chargeable period of 12 months begins on 1 April. (Clause 1(9).)

Amount of ARPT charge

The table below, which is set out in clause 4(5), sets out the chargeable amount for a single-dwelling interest based on the taxable value of that interest on the first day of the chargeable period, or the first day in the chargeable period on which the chargeable person is within the ARPT charge. The annual chargeable amount will be increased annually by reference to the increase in the consumer prices index for the year to September of the previous year (clause 5).

Annual chargeable amount	Taxable value of the interest on the relevant day
£15,000	Over £2 million up to £5 million
£35,000	Over £5 million up to £10 million
£70,000	Over £10 million up to £20 million
£140,000	Over £20 million

If the chargeable person is within the scope of ARPT (in relation to a particular interest) on the first day of the chargeable period, the ARPT liability is the amount corresponding to the annual chargeable amount for the taxable value of the interest (clause 4(2)).

If the single-dwelling interest is acquired after the start of a chargeable period (see Acquisition and disposal dates), the ARPT liability is calculated by multiplying the annual chargeable amount by the fraction N/Y (clause 4(3)).

"N" is the number of days from (and including) the first day the chargeable person is within the ARPT charge to the end of the chargeable period. "Y" is the number of days in the chargeable period. (Clause 4(6)).

If the chargeable person subsequently ceases to be within the scope of ARPT (in relation to a particular interest), typically, by disposing of the interest at some point during the chargeable period, an adjusted chargeable amount claim to reduce the ARPT liability may be made (see Adjusted chargeable amount).

Adjusted chargeable amount

If the adjusted chargeable amount exceeds the ARPT charge, a claim may be made (in, or by amendment to, an ARPT return) for the ARPT for that chargeable period to be reduced to the adjusted chargeable amount (clause 8(1), (2) and (5)). A claim must made by the end of the following chargeable period (clause 8(6)).

The adjusted chargeable amount is the total of the daily amounts for all the days in the period on which the chargeable person is within the scope of the charge (clause 8(3)). The daily amount is computed by multiplying the annual chargeable amount by the fraction 1/Y, where "Y" is the number of days in the chargeable period (clause 8(4)).

Acquisition and disposal dates

Specific rules are required to precisely determine the date of acquisition and disposal of a chargeable interest. This is because the ARPT liability for a chargeable period is determined by the number of days within that period that the chargeable person is within the scope of ARPT.

Acquisition

An acquisition is treated as taking place at the beginning of the effective date of the acquisition (clause 22(1)).

Entering into a contract (that is to be completed by a conveyance) is not an acquisition (clause 24(1) and (2)). However, substantial performance of the contract before its completion is treated as completion of the contract (that is, an acquisition) (clause 24(3)).

If, following substantial performance, the contract is rescinded or its performance is otherwise terminated before taking full effect, the buyer is treated as disposing of the chargeable interest on the date of rescission (or the date performance ceases) (clause 24(5) and (6)).

Disposals

A disposal is treated as taking place at the end of the day preceding the effective date of the disposal (clause 23(1)).

Entering into a contract (that is to be completed by a conveyance) is not a disposal (clause 25(1) and (2)). However, substantial performance of the contract before its completion is treated as completion of the contract (that is, a disposal) (clause 24(3)).

If, following substantial performance, the contract is rescinded or its performance is otherwise terminated before taking full effect, the seller is treated as re-acquiring the chargeable interest on the date of rescission (or the date performance ceases) (clause 25(5) and (6)).

Special situations

The ARPT charge is based on the number of chargeable days within a chargeable period that a dwelling is held by an NNP. Therefore, the legislation contains special rules for determining the precise dates that a dwelling enters and exits the ARPT regime. As well as identifying acquisition and disposal dates in straightforward property transactions (see Acquisition and disposal dates), the rules also deal with demolition, new builds and conversions.

New dwellings

Unless the conversions (see Conversions) or demolition and new dwelling rebuild (see Demolition and new dwelling rebuild) rules apply, the valuation date for a single-dwelling interest in a new dwelling, which includes a new dwelling produced by altering (structurally or otherwise) an existing building, is the earlier of the following:

The completion day.
The day on which the dwelling is first occupied.

(Clause 26.)

Conversions

If an existing building that is a dwelling (or dwellings) is structurally altered so as to become a different dwelling (or dwellings), the old dwelling(s) is treated as ceasing to exist and the new dwelling(s) as existing at the end of the completion day (or, if more than one dwelling, the completion day of the last to be converted) (clause 27(1), (2) and (4).)

The valuation date (see Taxable value and Valuation date) for a single-dwelling interest in a conversion is the day after the completion day (clause 27(3)).

If a building (or part) is altered to make it suitable for non-dwelling use, it will be a question of fact as to whether (and when) it becomes unsuitable for use as a dwelling (clause 32(1) and (2)). However, it cannot be before any required planning permission or development consent has been granted and the alterations accord with the permission or consent (clause 32(3)).

Demolition and damaged dwellings

There are special rules governing dwellings that are demolished and those demolished and replaced by new dwellings. These rules apply to demolitions occurring after 1 April 2013 (clause 28(1)). Unless and until these rules are triggered, the taxable value of any single-dwelling interest is determined as if the dwelling had not been demolished (clause 28(2)).

Demolition

If a dwelling is demolished, a person with a single-dwelling interest in it ceases to have such an interest, at the end of the first day demolition begins and the building ceases to be suitable for use as a dwelling, if HMRC is notified in writing that to the best of the person's knowledge there is no proposal to construct a dwelling(s) on the site (clause 29).

Demolition and new dwelling rebuild

If a dwelling is demolished and a new dwelling(s) is constructed on the site, the old dwelling only ceases to exist, and the new dwelling(s) comes into existence, at the end of the earlier of:

The completion day (or, if more than one dwelling, the completion day of the last new dwelling).
The day on which the last of the new dwellings to be occupied is first occupied.

The valuation date for a single-dwelling interest in a new dwelling is the day after the earlier of these days (clause 30(3)).

Demolition and new non-dwelling rebuild

If a dwelling is demolished and a building, that is not a dwelling, is constructed on the site, a person's single-dwelling interest in the demolished dwelling ceases at the end of the later of the day on which the:

Change of use is approved.
Dwelling ceases to be occupied.

(Clause 31.)

Damaged dwellings

A valuation date is triggered if all of the following apply:

A dwelling, in respect of which a person is within the ARPT charge, suffers substantial damage (other than in the course of demolishing part of the building) that is accidental, or otherwise outside the control of the person owning the single-dwelling interest in it.
Because of the damage the dwelling is temporarily unsuitable for occupation for at least 90 days.
The damage does not destroy the dwelling.

(Clause 33(1), (3)-(5).)

The valuation date is the day on which the dwelling becomes temporarily unsuitable for occupation (clause 33(2)).

Reliefs

The basic aim of ARPT is to dissuade individuals from holding dwellings for their personal use in corporate and certain other wrappers. This is to ensure that subsequent sales are subject to the full rate of SDLT applicable to property transfers. Therefore, there are a number of reliefs that are designed to remove from ARPT NNPs holding HVRPs for genuine business purposes. There will be identical or similar reliefs to those for the SDLT enveloping charge (see Legal updates, SDLT legislation: the 15% charge on enveloping high-value residential property and Draft Finance Bill 2013 legislation: key business tax measures: SDLT: 15% rate reliefs).

The reliefs operate by requiring identification of each day ("relievable day") within a chargeable period that the conditions for the relief are satisfied in respect of a single-dwelling interest. Broadly, if every day within a chargeable period is a relievable day, the entire ARPT liability in respect of the single-dwelling interest is relieved. If a proportion of the days within a chargeable period are relievable days, a corresponding proportion of the ARPT liability is relieved. Relief is given through the adjusted chargeable amount mechanism (see Adjusted chargeable amount): a chargeable person is not regarded as within the ARPT charge in respect of a single-dwelling interest on any relievable day.

Property rental business

A day is relievable if, at the end of that day, the owner of the single-dwelling interest is exploiting it in the course of a qualifying property rental business (QPRB) or is intending to do so. (Clause 34(1)-(3).)

A single-dwelling interest is not being "exploited in the course of a QPRB" at any time when a non-qualifying individual (NQI) is permitted to occupy the dwelling or it is intended that it will be made so available (clause 34(4)). If an NQI has been permitted to occupy a dwelling, a subsequent day cannot be a relievable day until the single-dwelling interest has been commercially exploited (clause 34(6)).

If during a chargeable period an NQI is permitted to occupy the dwelling, the owner of the single-dwelling interest will be treated as intending that the dwelling will be made available to an NQI throughout the period beginning with the start of the previous chargeable period (if the interest was owned at that time) and ending with the date permission to occupy was given (clause 34(7)). However, any period of occupation by a qualifying individual (in the course of the QPRB) will qualify for relief (clause 34(8)).

Exploitation of dwellings used in a trade

A day is relievable if, at the end of that day, the single-dwelling interest is being exploited as a source of income in the course of a qualifying trade or it is held with the intention of doing so (clause 36(1)-(3)).

If the 28-day condition (see Qualifying trade) has not been met on the first day the NNP is within the scope of ARPT (and the relief would otherwise be available), provisional relief will be given if the ARPT return includes a declaration that the 28-day condition will be met in the chargeable period (clause 37).

Property developers

A day is relievable if, at the end of that day, the owner of the single-dwelling interest acquired it in the course of a property development trade and holds the interest exclusively for any one, or a combination of both, of the following purposes:

Redeveloping and reselling the land in the course of the property development trade.
Redeveloping the land (without justifiable delay) with a view to exploiting it in the course of a QPRB.

(Clause 38.)

The response document emphasises the requirement for development work to be started as soon as reasonably practicable if the relief is to be available. However, if deferral is commercially sensible, the relief may still be claimed.

There are provisions, similar to those for QPRB relief (see Property rental business), that deny relief if an NQI is permitted to occupy the dwelling or it is intended that it will be made so available (clause 39).

There are also provisions that give relief in respect of single-dwelling interests acquired in the course of a property development trade in (part) exchange for new dwellings (clause 40). Presumably, this recognises that relief is only available under clause 38 if the acquired interest is to be redeveloped.

Property traders

A day is relievable if, at the end of that day, the owner of the single-dwelling interest is both:

Carrying on a property trading business.
Holding the interest as stock and for the sole purpose of resale in the course of the property trading business.

(Clause 42(1)-(3).)

There are provisions, similar to those for QPRB relief (see Property rental business), that deny relief if a NQI is permitted to occupy the dwelling or it is intended that it will be made so available (clauses 42(4) and 43(1)-(3)).

Employees and partners

A day is relievable if, at the end of that day, all of the following apply:

The owner of the single-dwelling interest, or a company within the same SDLT group, carries on a qualifying trade.
The interest is held for the purpose of making the dwelling available to a qualifying individual(s) for use as living accommodation and is, or is to be, so made available (mainly) for the purposes of the qualifying trade.

(Clause 44.)

A qualifying individual is:

In relation to a partnership, an individual who is a partnership member but not an individual entitled to a 5% or more share in the:
- partnership's income profits;
- company owing the single-dwelling interest; or
- single-dwelling interest.
In relation to a non-partnership, an employee but not one providing "excluded domestic services" or who is entitled to a 5% or more share in the:
- income profits of the qualifying trade.
- company owing the single-dwelling interest; or
- single-dwelling interest.

(Clause 45(1)-(4).)

An individual provides "excluded domestic services" if his employment duties include providing services connected with the occupation of the dwelling (or a linked dwelling) by an individual connected with an owner of the single-dwelling interest (clause 45(5)-(7)).

Farmhouses

A day is relievable if, at the end of that day, the owner of the single-dwelling interest in a farmhouse is a person carrying on a qualifying trade of farming and the farmhouse is occupied by an individual who both:

Occupies the farmhouse (within the meaning of section 1125 of the Corporation Tax Act 2010) for the purposes of the trade.
Has a substantial involvement (as a manager or otherwise) in the day-to-day work of the trade.

(Clause 47(1)-(3).)

A farmhouse is a dwelling that both:

Forms part of land occupied for the purposes of the farming trade.
Is appropriate to a dwelling occupied in connection with the related farm land, having regard to the farm size and the nature and scale of the trade.

(Clause 47(4).)

ARPT returns and payment

Ordinarily, an ARPT return must be delivered within 30 days of the first day within a chargeable period that a person is within ARPT. Therefore, if a person is within ARPT on 1 April (the start of a chargeable period), a return must be filed by 30 April (clause 49(2)). If a property is acquired on 1 June, a return must be filed by 30 June.

A separate return is required for each single-dwelling interest (clause 49(1) and (2)). However, the response document states that a single return may be made in respect of multiple dwellings if reliefs in respect of them all are being claimed. Presumably, these rules will be introduced by regulations or set out in guidance.

If a dwelling comes within the scope of ARPT because it becomes a new dwelling or converted dwelling (and not because it is acquired), a return must be filed within 90 days (clause 49(3)).

For the chargeable period beginning on 1 April 2013, an ARPT return must be filed by 1 October 2013 or, if the property was not within the scope of ARPT on 1 April 2013, the later of 1 October 2013 and the period ending 30 days (or 90 days) after the property comes into charge (paragraph 1, Schedule 2).

Generally, amended returns must be filed by 31 March of the year after the end of the chargeable period to which the return relates (paragraph 3(3), Schedule 1). For example, an amended return for the chargeable period 1 April 2013 to 31 March 2014 may be amended until 31 March 2015.

Expected further draft legislation

The response document states that further draft legislation dealing with the following aspects of ARPT will be published later:

Reliefs for charities, public bodies, financial institutions acquiring dwellings by enforcing security, property conditionally exempt from inheritance tax, and other targeted reliefs.
Dwellings subject to alternative finance arrangements (ensuring that finance receivers rather than providers are subject to ARPT).
The taxable value of leases (ensuring their value reduces as they near expiry).
De minimis rules preventing aggregation of a connected individual’s interest in a dwelling with an NNP’s interest (see Aggregation and fragmentation of interests).
Attribution of a reasonable portion of the value of a superior interest in a dwelling held by an NNP to an inferior interest held by an NNP holding a non-controlling stake in the NNP owning the superior interest.
Appeals and related matters, and record keeping.
Connection between partnerships and CISs.

Next steps

The closing date for comments on the draft legislation is 6 February 2013 but, in light of the 1 April 2013 start date, earlier comments are encouraged. The further draft legislation (see Expected further draft legislation) "will be published shortly after 11 December 2012".

Definitions and terminology

Acquisitions and disposals of chargeable interests

The acquisition of a chargeable interest includes any acquisition regardless of how the acquisition is effected and includes acquisitions effected by the parties, court order, statutory provision or operation of law (clause 21(1)).

The surrender or release of a chargeable interest is both:

An acquisition of that interest by any person whose interest or right is benefited or enlarged by the transaction.
A disposal by the person ceasing to be entitled to that interest.

(Clause 21(2).)

The variation of a chargeable interest is both:

An acquisition of a chargeable interest by the person benefiting from the variation.
A disposal of a chargeable interest by the person whose interest is subject to or limited by the variation.

(Clause 21(3).)

Chargeable interest

A chargeable interest is any of the following:

An estate, interest, right or power in or over land in the UK.
The benefit of an obligation, restriction or condition affecting the value of any such estate, interest, right or power.

(Clause 9(1).)

The following interests (exempt interests) are not chargeable interests:

An interest or right (other than a rentcharge) held to secure the payment of money or the performance of any other obligation ("security interest").
A licence to use or occupy land.
A tenancy at will (in England and Wales or Northern Ireland).

(Clause 9(3) and (4).)

Chargeable person

A chargeable person is a person liable to pay ARPT in relation to the single-dwelling interest owned or held, namely:

The company.
In the case of a partnership, the responsible partners (that is, all the members of the partnership on the first day in the chargeable period on which the partnership meets the ownership condition).
In the case of a CIS:
- if the CIS is a unit trust scheme, the trustee of the scheme;
- if the CIS is an open-ended investment company (OEIC), the body corporate referred to in section 236(2) of the Financial Services and Markets Act 2000;
- in relation to an EEA UCITS that is not an OEIC or unit trust scheme, the management company for that UCITS; and
- in any other case, the person who has day-to-day control of the management of the scheme property.

(Clause 2(2), (3) and (5).)

Company

A company is a body corporate other than a partnership (clause 60(1)).

Completion day

In relation to establishing the valuation date for new or converted dwellings, the completion day is the day on which the new dwelling comes into existence for the purposes of:

Part 1 of the Local Government Finance Act 1992 (council tax: England and Wales).
Part 2 of that Act (council tax: Scotland).
Rates (Northern Ireland) Order 1977 (SI 1977/2157) (N.I. 28).

(Clauses 26(3), 27(4) and 30(6).)

Collective investment scheme

A collective investment scheme has the same meaning as in section 235 of the Financial Services and Markets Act 2000 (see Practice note, Investment funds: tax: introduction: The UK regulatory regime for funds) (clause 60(1).) However, a partnership is not a CIS or unit trust scheme for the purposes of ARPT (clause 56(4)).

Dwelling

A building or part of a building is a "dwelling" at any time when it is used or suitable for use as a single dwelling, or it is in the process of being constructed or adapted for such use (clause 13(1)). A building (or part of a building) used as any of the following is not used as a dwelling:

Residential accommodation for school pupils.
Residential accommodation for students (including halls of residence for students in further or higher education).
Residential accommodation for members of the armed forces.
An institution that is the sole or main residence of at least 90% of its residents.
A home or other institution providing residential accommodation for children.
Hall of residence for students in further or higher education.
Care or rehabilitation home.
Hospital or hospice.
Prison or similar establishment.
Hotel, inn or similar establishment.

(Clause 13(4).)

If a building, or part of a building, is used for one of these purposes, its suitability for any other use is disregarded (clause 13(5)). Subject to the special rules on damaged dwellings (see Demolition and damaged dwellings), a temporary period of unsuitability for use as a dwelling is disregarded in determining whether the building (or part) is a dwelling during a particular period (clause 13(6)).

Land that is, or is at any time intended to be, occupied or enjoyed with a dwelling as a garden or grounds is part of that dwelling (clause 13(2)).

Part of a building that is suitable for use as a dwelling may, nevertheless, form part of a larger single dwelling. Similarly, a building or structure that is in the grounds of a dwelling, occupied or enjoyed with it, and suitable for use as a single dwelling may, nevertheless, form part of the larger single dwelling. (Clause 16.)

Dwellings in grounds of another dwelling

There are detailed rules that provide for a main dwelling and an associated dwelling (essentially, a dwelling standing in the grounds of the main dwelling but not occupied or enjoyed with the main dwelling) to be treated as suitable for use a single dwelling (see clause 17).

Separate dwellings in the same building

There are detailed rules that provide for two parts of a building with private access between them, each of which is a dwelling, which together are not used or suitable for use as a single-dwelling, to be treated as a single-dwelling if a common ownership condition and a use condition are met (see clauses 18 and 19). For this purpose, any structure (for example, a terrace of houses) comprising or including dwellings is regarded as a building (clause 20).

Power to extend meaning of dwelling

HM Treasury may, by regulations, amend the ARPT legislation (directly, or through amending the corresponding SDLT legislation) so as to extend the cases where use of a building is to be "use of a building as a dwelling" (clause 16(1) and (2)).

Effective date

The effective date of an acquisition (or a disposal) is the date on which the acquisition (or the disposal) is completed (clauses 22(2)(a) and 23(2)(a)).

HMRC has power to provide, by regulations, for any alternative date to be specified as an effective date (clauses 22(2)(b) and 23(2)(b)).

Market value

"Market value" is to be determined in the same way as it is for the purposes of the Taxation of Chargeable Gains Act 1992 (TCGA 1992) (see sections 272 to 274 of TCGA 1992) (clause 6(8)).

The government intends to introduce, from June 2013, a pre-return ARPT banding service under which the Valuation Office Agency will review the value attributed to the dwelling. However, the service will only be available to those whose self-assessment of the value puts it within 10% of one of the thresholds. Details will be published in the spring.

No specific valuation requirements are being prescribed. As such (subject to the pre-return ARPT banding service), the onus is on the taxpayer to advance an appropriate reasonable valuation and be in a position to justify it if called upon to do so.

Non-qualifying individual

A non-qualifying individual is any of the following:

An individual who is beneficially entitled to the interest.
An individual (connected person") who is connected with a person beneficially entitled to the interest.
In relation to the property developer reliefs only, if the company is beneficially entitled as a partnership member, any person who is connected with a partner of that partnership.
A relevant settlor.
The spouse or civil partner of a connected person or of a relevant settlor.
A relative of a connected person or of a relevant settlor, or the spouse or civil partner of a relative of a connected person or of a relevant settlor.
A relative of the spouse or civil partner of a connected person or of a relevant settlor.
The spouse or civil partner of a person falling within the previous bullet.

(Clauses 34(5), 41(2) and 43(4).)

For this purpose:

"Relative" is a brother, sister, ancestor or lineal descendant.
"Relevant settlor" is an individual who is the settlor in relation to a settlement, the trustee of which is connected with the property investor, developer or trader.
"Qualifying individual" is an individual other than a non-qualifying individual.

(Clauses 34(10), 41(3) and 43(5).)

Partnership

A partnership is any of the following:

A partnership within the Partnership Act 1890.
A limited partnership registered under the Limited Partnerships Act 1907.
A limited liability partnership formed under the Limited Liability Partnerships Act 2000 or the Limited Liability Partnerships Act (Northern Ireland) 2002.
A firm or entity of a similar character to any those listed in the first three bullets formed outside the UK.

(Clause 56(1).)

A partnership is not a CIS or unit trust scheme for the purposes of ARPT (clause 56(4)).

Property development trade

A property development trade is a trade that both:

Consists of or includes buying and redeveloping for resale residential or non-residential property.
Is run on a commercial basis with a view to realising profits.

(Clause 41(1).)

Property trading business

A property trading business is a business consisting of or including activities in the nature of a trade of buying and selling dwellings (clause 42(5)).

Qualifying property rental business

A qualifying property rental business is a business that is a property rental business for the purposes of the Corporation Tax Act 2009 (save that rent within classes 2 to 6 in the table in section 605(2) of the Corporation Tax Act 2010 falls outside that description) and is carried on both:

On a commercial basis.
With a view to realising profits.

(Clause 35(2)-(5).)

Qualifying trade

The term qualifying trade is used in each of the following reliefs:

Exploitation of dwellings used in a trade.
Occupation by employees and partners.
Farmhouses.

Its meaning differs for each relief.

Exploitation of dwellings used in a trade

In relation to the relief for exploitation of dwellings used in a trade (see Exploitation of dwellings used in a trade), a qualifying trade, in relation to a single-dwelling interest, is a trade that satisfies all of the following conditions:

It involves permitting persons to make use of, stay in or otherwise enjoy the dwelling (including a significant part of its interior).
It is conducted on a commercial basis with a view to realising profits.
The opportunity to make use of, stay in or otherwise enjoy the dwelling (including a significant part of its interior) as trade customers is available to the public for at least 28 days in the chargeable period (28-day condition).

(Clause 36(4)-(6).)

Occupation by employees and partners

In relation to the relief for certain interests held for occupation by employees or partners (see Employees and partners), a qualifying trade is a trade that is conducted on a commercial basis with a view to profit and is not any of the following:

Property rental business.
Property development trade.
Property trading business.

(Clause 44(4).)

Farmhouses

In relation to the relief for farmhouses (see Farmhouses), a qualifying trade is a trade conducted on a commercial basis with a view to realising profits (clause 47(6)).

Substantial performance

The SDLT definition of "substantially performed" in section 44 of the Finance Act 2003 (see Practice note, SDLT and contracts for the transfer of land: What is substantial performance?) is imported into the ARPT legislation (clauses 24(9) and 25(9)). However, because of the different nature of ARPT, any subsequent completion of the contract is not treated as an acquisition or a disposal (clauses 24(4) and 25(4)).

Off-plan purchases; substantial performance

If a contract to acquire a chargeable interest in (part of) a building to be constructed or adapted for use as a dwelling ("off-plan" purchase) is substantially performed before construction or adaptation has begun, the chargeable interest is treated as an interest in or over a dwelling (clause 14(1) and (2)). However, if subsequently the construction obligations cease before the construction or adaptation begins, there is no deemed acquisition of a dwelling at that time (clause 14(3)).

Comment

However, it is difficult to comprehend the sense of tax policy that creates a new tax, the scope of which is considerably narrowed in order to ensure that it only targets a narrow range of behaviour. This is particularly so when the same behaviour (essentially, holding property in corporate wrappers) has already been viciously attacked through the introduction of the 15% SDLT charge and is to be further targeted with the proposed CGT changes (see Background).

Some may be disappointed with HMRC's decision to restrict its "pre-return banding check service" to self-assessed values within 10% of one of the ARPT thresholds given the potential for penalties and interest if valuations are wrong. However, this seems reasonable given that a wrong valuation only affects the ARPT liability if the correct valuation takes it into a different band. The five-year gap between valuation dates also seems to strike a reasonable balance between onerous compliance and tax take. Of course, the valuation exercise will be more or less onerous depending on the nature of the property. For example, valuing a dwelling that is part of a mixed use property with gardens and grounds may be a more difficult exercise than valuing a property exclusively used as a dwelling in an area with good comparables.

The closing date for comments on the draft legislation is 6 February 2013. This a tight deadline given that draft legislation on elements of ARPT will not be published until later this month. However, more serious is the government's delay in publishing draft legislation extending CGT to certain non-UK resident NNPs disposing of HVRPs on or after 6 April 2013. This creates uncertainty for those contemplating de-enveloping.

Sources:

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Annual residential property tax (ARPT): draft Finance Bill 2013 | Practical Law