Aggressive new mansion taxes have created a catch-22 situation causing some modest earners to have to sell their homes.
Thousands of people living in mansions which they have sheltered from inheritance tax (IHT) will be slapped with eye-watering six-figure tax bills if they comply with the government over new tax-sheltering rules, it has emerged.
Sheltering expensive homes from IHT by buying them through companies (known as tax enveloping) has historically been a popular tax-saving strategy for some owners of high-value UK properties, but new levies which came into force on 6 April have made it a much more expensive way of preserving estates.
In the latest Budget, the government confirmed the enforcement of a stack of new corporate mansion levies on homes valued at more than £2m and owned by companies - a regime designed to pressure people into moving expensive properties out of companies (owned by individual or family trusts) and into their own names, thereby forcing them to pay their "fair share" of tax.
These levies are designed to put an end to the practice of corporate purchasers buying up expensive properties in the UK and paying no tax.
But a catch in trust law means that while foreigners can re-register properties in their own names without a fuss, UK residents who have been living rent-free in company-owned homes over the past five years will be faced with even bigger tax bills, if they do what the government wants and re-register the houses in their own names. The more expensive their houses are and the longer they have been living there, the more they will have to pay.
The introduction of the new taxes has thrown these UK residents into a costly catch-22 tax trap that private banks and property lawyers describe as the biggest issue their clients are currently facing.
Residential properties worth over £2m and held through companies are now subject to a 15 per cent stamp duty annual tax on enveloped dwellings (ATED) of between 0.3 per cent and 0.7 per cent a year, and capital gains tax at 28 per cent on gains made since 2013, when they are sold.
The trap created by the new regime also means a number of lower earners living in high-value homes, owned by trusts through companies, will be forced to sell their homes. This is because in order to keep them they will have to stump up thousands every year for the new levies (the new annual charge is £15,000-£140,000 a year, increasing on a sliding scale with house value), or have enough saved to shell out a lump sum to cover the one-off cost of re-registering their property (a 28 per cent capital gains tax on the market value of the rent for every year they have lived in the property since 2008).
Tim George, partner at law firm Withers, recently helped a London-based teacher sell the home he has lived in since he was a child, because he doesn't have the cash to pay the levies or to take the home out of the trust and underlying company.
He said: "The clock is ticking for home-owners in this position. The levies have already kicked in and if you don't act fast you could find yourself stuck in this messy structure and having to sell your house."
On whether homeowners should succumb to the new tax regime or take the hit and sell up, Paul Knox, head of UK Wealth Advisory at JPMorgan Private Bank, said: "Many of them are damned if they do and damned if they don't. You need to weigh it up yourself as whether you should leave your property in your company will depend upon personal circumstances."
Investors Chronicle contacted HMRC for information on the exact number of UK residents being affected, and how much tax they owe, but it was unable to help.
Reasons to keep properties worth over £2m held in companies
■ If the cost of undoing the tax shelter is more than the annual levies. This may be the case if the property has been lived in for a long period and is very high value.
■ Confidentiality of address - if a residential property is held through a company, the residents' address is kept private.
■ If the property is being left to young children or teenagers, a family may prefer it to be managed by a third party until they are old enough to deal with it.
Why do people get taxed for removing properties owned by companies held by trusts if they have been living in it without paying rent?
When a property is owned within a trust, beneficiaries can legally live in it rent-free. But since 2008, a law has been in force that says the annual market value of the rent on the property counts as a taxable benefit of the trust. This means when the trust either disposes of, or sells it, for every year you have lived there rent-free since 2008, you will be charged 28 per cent capital gains tax on the market value of the annual rent. So if a family had been living in a £5m house for five years, if the market value of the rent on it was £25,000 a year (5 per cent of house value), the family would have to pay £35,000 to avoid the government's new corporate mansion levies.
