Haysmacintyre’s Head of Tax, Katharine Arthur, outlines some announced changes that affect property, including freezing indexation allowance for corporation tax, which will see corporates joining individuals in paying tax on gains arising from inflationary uplifts in value.
Just last month, the Chancellor delivered his first Autumn Budget. As is often the case with Budgets, the Chancellor shall giveth and the Chancellor shall taketh away, although this time, whilst property investors may not be blessing the name of the Chancellor, they may have some reasons to be thankful, albeit less so if based overseas.
NON-RESIDENT / GAINS
The Government has announced plans that, from April 2019, non-residents will be taxed in the UK on gains arising from the disposal of all types of UK immovable property as well as on certain indirect disposals of interests in ‘property rich’ entities, such as companies, partnerships and property unit trusts. This represents a fundamental change to the taxation of UK real estate.
The proposals are included in a consultation document, released on Budget day and open until 16 February 2018, which makes it clear that the thrust of these measures will become law. With the scope, commencement date and core features of the reform being fixed, the consultation focuses on how the legislation can be effectively targeted, whilst not placing unnecessary burdens on taxpayers.
Currently non-residents are, generally, not taxed on gains arising on the disposal of commercial property or on indirect disposals of UK property, even though disposals of residential property have been caught in the tax net since April 2015. The announcement also extends the scope of the existing capital gains tax (‘CGT’) rules that apply to residential property by removing the exception for widely held non-resident companies.
Prima facie these changes reduce the attractiveness of the UK to overseas property investors, but we suspect that the Government is gambling on the, relatively, low rates of tax not being a sufficient deterrent to potential overseas investors. The changes will more closely align the treatment of non-residents with that for UK residents and will reduce the incentive to hold UK property through offshore structures.
NON-RESIDENT / PROPERTY COMPANIES
Following a consultation earlier this year, the Government has announced that non-resident companies will be brought into the corporation tax regime for UK property income and gains with effect from April 2020. Such companies are currently subject to income tax on UK property income, with any gains falling into the existing CGT regime.
In theory, this will have the effect of reducing the tax rate on rental profits and gains by such companies, especially with corporation tax rates falling from 19% to 17% in April 2020. However, a consequence of this change is that non-resident companies will be brought into the recently introduced corporate interest restriction rules, loss restriction rules and the hybrid mismatch rules.
We strongly advise non-resident landlord companies, particularly those with an annual group net interest expense in the UK of more than £2 million, to consider the impact of these changes on their financing arrangements before the new rules apply.
We expect further clarification to follow on how bringing non-resident property companies into the corporation tax regime will interact with the changes to the taxation of gains by non-residents which will apply from a year earlier (from 1 April 2019).
SDLT / FIRST TIME BUYERS
A welcome new SDLT relief has been introduced for first time buyers purchasing residential property with a value of £500,000 or less on after 22 November 2017. The relief will only be available to individuals who have never owned an interest in a residential property in the UK, or abroad, at any time and are acquiring the property to occupy as their main residence. The SDLT relief available to a first time buyer on the acquisition of a property to occupy as their main residence is now as follows: No SDLT will be payable where the purchase price is £300,000 or less; the SDLT payable will be 5% on the consideration above £300,000, where the consideration is between £300,000 and £500,000.
The Government has confirmed that the reduction in the SDLT filing and payment window, from 30 to 14 days, will apply to land transactions from 1 March 2019. There will be minor amendments to provide exception from the additional 3% of SDLT where additional residential property is acquired in certain cases, including: Where there is a transfer between spouses; where a court order prevents a main residence being sold following a divorce; where a person adds to their interest in their main residence.