Budget 2012: Plans for UK GAAR

The long awaited General Anti-Avoidance Rule is to finally hit the UK, with consultations due to begin this year, and the legislation introduced in the Finance Bill next year.

Following recommendations from Graham Aaronson QC’s working group in November, chancellor George Osborne announced the GAAR, with strong comments that he viewed ‘tax evasion as morally repugnant.’

Government is to close down loopholes, tackling practices such as 'enveloping' of high value properties into companies to avoid paying a fair share of tax. A 15% Stamp Duty Land Tax, imposed so as to take effect immediately, will affect residential properties over £2m, purchased by companies.

Government is to also consult on the introduction of an annual charge on residential properties valued at over £2m owned by such entities, with the intention of legislating this in the Finance Bill 2013, with commencement in April 2013.

Supporting this measure, the government will extend the capital gains tax regime to gains on the disposal of UK residential property and shares or interests in such property by non-resident companies, as of April 2013.

Issuing a stern warning to those who might flout the rules, Osborne said: 'Let me make this absolutely clear to people. If you buy a property in Britain that is used for residential purposes, then we will expect stamp duty to be paid. That is the clear intention of parliament.

'I will not hesitate to move swiftly, without notice and retrospectively if inappropriate ways around these new rules are found.'

Currently, companies who purchase properties using the ‘corporate envelope’ structure avoid paying the regular 5% stamp duty land tax, and only pay 0.5%, since the sale of the property is considered a sale of company shares, the duty for which is only 0.5%, allowing a saving of 4.5%.

Gary Heynes, private tax partner at Baker Tilly, said the new rules would largely act as a deterrent, in that entities would now accept the new 7% stamp duty rate for properties worth over £2m.

‘They would understand that if they wanted to get this into a corporate envelope structure, it would be rather expensive, at 15%, and that coupled with the potential of capital gains tax, would not be attractive,’ said Heynes.

Grant Thornton’s head of tax, Francesca Lagerberg, said the new measures were long expected, although the detail of the legislation will be picked over to see if it has hit its target.

‘However, the chancellor made it clear that if avoidance continues he will react retrospectively. Keeping to its promise to consult further, the GAAR will now be subject to a broad consultation with a view to implementation from April 2013. It needs this input. Hard evidence from other jurisdictions that have gone the GAAR route eg, Canada and Australia, shows how hard it is to formulate a rule that both clarifies what it does and doesn't cover and is practical to implement.

‘Business will be looking closely to ensure that commercial transactions do not get bogged down in cumbersome rules and lengthy clearance procedures. Equally they will want certainty that what they do is not inadvertently caught by a GAAR and become a barrier to business in the UK,’ said Lagerberg.