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  • Autumn Budget 2017

    Real Estate overview

Article:

Autumn Budget 2017 - Real Estate overview

23 November 2017

With another Budget, comes another assault on the real estate sector with further significant changes to the tax treatment of property transactions. Property investment companies, both in the UK and overseas, will need to brace themselves for higher charges to tax in the future.

However, not all of the changes are unwelcome news. The Government has announced its intention to make significant investment in infrastructure over the next five years which should provide a welcome boost to the construction sector. Furthermore, in addition to measures aimed at increasing the supply of housing, first-time buyers will be given relief from stamp duty on the purchase of their first home with immediate effect.

Housing

In order to address what is now felt by many to be a ‘broken’ housing market, the Chancellor has made a commitment to an additional £15.3bn of funding for housing over the next five years, taking the total investment over this period to £44bn. It is expected that this additional investment will enable UK housebuilding to reach 300,000 new homes a year by 2022.

In order to support the needs of the construction industry in delivering this objective there will also be investment in training, in particular through the National Retraining Scheme, to provide a skilled workforce available for employment by property businesses.

Changes will be made to the planning system to ensure that unused land is made available for development. A review will also be undertaken of planning permissions granted and which have not proceeded to the build phase. This will include the creation of a central register of planning permissions to provide Government with access to information on the progress towards them being built out.

Ownership of empty homes will be discouraged by legislating to allow councils to charge a council tax premium of 100% for such properties.

Stamp duty land tax for first-time buyers

From Budget day, first time buyers will benefit from 100% relief from stamp duty on the purchase of their first home up to a value of £300,000. The relief will also be available on the first £300,000 on the purchase of homes up to £500,000 with the balance being chargeable at 5%. Homes purchased for over £500,000 will not attract relief.

To qualify for relief, the buyer must never have owned an interest in a residential property, either in the UK or anywhere else in the world, and must intend to occupy the property as their main residence.

Abolition of indexation allowance

Since March 1982, UK resident companies have benefitted from indexation allowance which reduces the capital gain arising on the disposal of investment properties, and properties held as tangible fixed assets for occupation, to reflect the effect of inflation over the period of ownership based on RPI.

For disposals on or after 1 January 2018, the amount of indexation allowance will be frozen at the level at 31 December 2017. This will mean that any increase in value from that date, including the entirety of any increase in value for properties acquired thereafter, will be charged to tax on a sale.

This marks the end of a very valuable relief and represents a potentially significant increase in tax charges for companies (forecast to be worth £1.8bn over the course of the next five years).

Non-UK resident investors - gains on property disposals

Alongside the Budget, a consultation document has been published proposing that the charge to tax on gains will be extended. Currently, gains on residential property are charged to tax in the hands of non-UK resident individual investors and non-UK resident corporate investors that are not widely held.

From April 2019, gains made by non-residents on any UK property, including commercial property and residential property owned by diversely held companies will be chargeable to UK tax. Properties not already chargeable to tax will be rebased to market value in April 2019 for this purpose.

Some exemptions will still be available to entities which would not be chargeable to corporation tax if they were UK resident, for example pension funds.

Non-UK resident investors – gains on indirect disposals of properties

In some cases, disposals of UK investment properties take place through a sale of the corporate entity owning the property rather than through a sale of the property itself. Where non-resident investors sell shares in such companies, in most cases they are not currently within the charge to UK tax.

It is proposed that from April 2019, gains non-UK residents make on the disposal of shares which derive their value from UK property investments may be charged to UK tax where certain conditions are met. The two main conditions for this to apply will be:

  1. Gains on sales of shares where the seller holds, or has held at some point in the last five years, an interest of 25% or more in the company. Interests held by related parties would be aggregated for this purpose. 
  2. Companies where at the date of disposal at least 75% of the market value of the gross assets of the company represents UK land. No discount will be permitted in this calculation for outstanding liabilities such as debt secured on the property. For this purpose, assets will include:
  • A shareholding in a company deriving its value directly or indirectly from land
  • A partnership interest deriving its value directly or indirectly from land
  • An interest in settled property deriving its value directly or indirectly from land
  • Any option, consent or embargo affecting the disposition of land.

However, when calculating the gain on the disposal of the shares, the cost of the shares would be rebased to the market value in April 2019.

Anti-forestalling measures are also proposed which would take effect from 22 November 2017. These would nullify any attempt to circumvent the charge undertaken prior to 2019, in particular by non-residents seeking protection under beneficial double tax treaties. It is proposed that advisers to such transactions will have a reporting obligation.

Non-UK resident companies – charge to corporation tax

Earlier this year the Government consulted on a proposal to bring non-UK resident companies currently chargeable to income tax on rental business profits and non-resident capital gains tax on residential property gains within the charge to corporation tax.

It has been confirmed that this proposal will be implemented (subject to consultation) with effect from April 2020. This will mean that such companies will benefit from the lower rate of corporation tax of 17% from April 2020 (compared to the current income tax rate of 20%). However, the rental profits of such companies will be calculated using corporation tax principles in the future rather than income tax principles. Consequently, new rules which took effect on 1 April 2017 for UK resident corporates restricting the use of brought forward losses and capping deductions for interest charges, broadly to 30% of EBITDA, will also apply to non-UK resident companies from 2020. Taxable rental profits may, therefore, be higher under the corporation tax regime than they would have been under income tax rules.

Real estate investment trusts (REITs)

Some of the changes outlined above on the taxation of gains of non-UK residents could have an impact on the operation of the UK REIT regime where the REIT has non-UK resident investors or itself has investments structured through non-UK resident companies.

From 2019, non-UK resident investors with a holding of 25% or more in a UK REIT would be chargeable to UK tax on a disposal of their shares. Such a holding in isolation is unlikely as it would result in the shareholder being a holder of excessive rights. However, there may be cases where a larger shareholding has been fragmented to which this would be applicable.

A gain on a disposal of a property by a non-UK resident company which is owned by a UK REIT would also come within the REIT rules as a tax-exempt gain under the REIT regime rather than as an exempt gain by virtue of having been realised by a non-UK resident company. This will result in the distribution of such gains to shareholders by the REIT being treated as a property income dividend potentially subject to withholding tax rather than as a normal dividend.

The position regarding a disposal of shares in a non-UK resident company within a REIT structure is likely to be complex.

Annual tax on enveloped dwellings (ATED)

ATED charges are to be increased by 3% for the year to 31 March 2019. The new rate bands from 1 April 2018 will be:

Property value

ATED charge

£500,001 - £1,000,000

£3,600

£1,000,001 - £2,000,000

£7,250

£2,000,001 - £5,000,000

£24,250

£5,000,001 - £10,000,000

£56,550

£10,000,001 - £20,000,000

£113,400

Over £20,000,000

£226,950

Business rates

The key change announced on business rates was that from 1 April 2018 the indexation of business rates will be based on CPI as a measure of inflation rather than RPI (which is generally higher). This was already planned but has been brought forward.

In an unusual step, retrospective legislation will be enacted to end the so-called ‘staircase tax’ whereby different business rates could apply to businesses depending on factors such as whether the staircases in their offices were communal or private. Businesses affected by this will be able to request that bills are recalculated, with backdating to April 2010.

A £1,000 business rate discount for pubs with a rateable value of up to £100,000 will be extended for a further year from 1 April 2018.

However, the Government is also introducing a change to the pattern of revaluations for business rates which could result in business owners facing more frequent increases in the future. The next revaluation for business rates is due in 2022. Thereafter, revaluations will now take place every three years. Businesses will be required to provide information to the Valuation Office regarding who is responsible for business rates and characteristics of the property including the commercial use of the property and the rent paid. Implementation of this measure will be subject to consultation in Spring 2018.

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