In last year’s Budget we saw significant announcements in relation to bringing non-residents in the charge to UK tax on all direct and certain indirect disposals of UK real estate from April 2019, and non-resident companies within the charge to UK corporation tax on property income from April 2020.
In addition to some further developments in those areas, following consultation, there were a number of other new developments impacting on real estate, in particular in relation to capital allowances.
Taxing gains made by non-residents on UK immovable property
As announced at Autumn Budget 2017, and following a consultation, this measure extends the scope of the UK’s taxation of gains accruing to non-UK residents to include gains on disposals of interests in non-residential UK property. It also taxes non-UK residents’ gains on interests in UK property rich entities (for example, selling shares in a company that derives 75% or more of its value from UK land).
The measure will have effect for disposals made on or after 6 April 2019.
Draft legislation in respect of the core provisions was published in July 2018, together with some proposed provisions relating to collective investment vehicles. Subsequently HMRC has been consulting with relevant stakeholder groups, to address concerns raised in the consultation over taxation of exempt and similar investors and multiple tax charges on funds.
Whilst no specific details were published today, it was confirmed that a detailed technical note in respect of collective investment vehicles will be published on 7 November 2018 alongside the Finance Bill.
Proposed extension of the Real Estate Investment Trust (“REIT”) exemption on direct disposal of qualifying assets to disposals of UK property rich entities
To coincide with the aforementioned changes with effect from 6 April 2019 in relation to other collective investment vehicles changes will also be made to the UK REIT regime.
Where a UK REIT is UK property rich, its gains on disposals of UK property rich entities will be exempted under the same mechanism as property disposals.
Bringing non-resident companies chargeable to income tax within the charge to corporation tax
The government has previously confirmed that, from 6 April 2020, non-UK resident companies that carry on a UK property business or have other UK property income, will be charged to corporation tax, rather than being charged to income tax as at present.
This will mean that the UK property income profits chargeable to corporation tax will be calculated in accordance with corporation tax principles, which will include the corporate interest and loss restrictions.
Draft legislation was published in July, and an updated version of this legislation was published today. Transitional measures in July included that the change from Income Tax to Corporation Tax will not create a disposal event for capital allowance purposes of the Capital Allowances Act 2001, and that existing Income Tax losses will be grandfathered so that it will be possible to carry them forward to the Corporation Tax regime.
The legislation published today includes further transitional and anti-avoidance provisions, and also clarity on how the loan relationship and derivative contract rules will apply.
The Chancellor has announced that the government will introduce a new Structures and Buildings Allowance (SBA) for structures and buildings (excluding dwellings). Relief will be provided on eligible construction costs where the contract has been entered into on or after 29 October 2018, at an annual rate of two percent on a straight-line basis.
Since the abolition of Industrial Buildings Allowances in 2011 no relief has been available for capital expenditure on most structures and buildings other than through capital allowances for plant and machinery.
Whilst the proposed new relief has some similarities to industrial building allowances, it is intended to apply to a wide range of structures and buildings including office buildings, retail and wholesale premises, and warehouses.
As noted above the relief will not be available for a building or structure which constitutes a “dwelling”. The government welcomes views on the appropriate definition of dwelling for this purpose, but the technical note published today indicates that excluded dwellings could include student accommodation, but not buildings used as hotels and care homes.
The availability of this relief in specific cases will require careful consideration, particularly in relation to the commencement rules.
Other capital allowances changes
There were a number of other changes announced which impact on the taxation of UK property. In particular:
- The rate of allowances in respect of the special rate pool will reduce from 8% to 6% from April 2019.
- The annual investment allowance (AIA) will increase to £1 million in relation to qualifying investment made between 1 January 2019 and 31 December 2020 inclusive.
- Measures will be introduced to put beyond doubt the position that land alteration expenditure in relation to the installation of the plant or machinery will qualify for plant and machinery capital allowances only where the plant or machinery itself qualifies for capital allowances.
- The withdrawal of first year allowances for qualifying plant and machinery listed on the Energy Technology List and Water Technology List from April 2020.
Corporation tax: capital loss restriction
The government has announced that it will consult on bringing the tax treatment of corporation tax capital losses into line with the treatment of income losses for companies. From 1 April 2020, the government will restrict the proportion of annual capital gains that can be relieved by brought-forward capital losses to 50%. The measure is subject to the existing allowance that gives companies unrestricted use of up to £5 million brought forward losses each year. The measure will be subject to anti-avoidance rules.
Response to accounting changes for leasing (IFRS 16)
Following consultation, the draft legislation published on 6 July 2018 is to be revised to include changes in relation to structured finance arrangements, writing down allowances for finance lessors and treatments of long-funding leases on adoption of IFRS 16, and the computational rules for the spreading of the transitional adjustment.
Capital gains tax
The government has announced that it will consult on the reform of lettings relief (which can effectively extend principal private residence relief for individuals) so that from April 2020 it only applies in circumstances where the owner of the property is in shared occupancy with the tenant. The final period exemption will also be reduced from 18 months to 9 months.
Residential property filing and payment window
As previously announced the government will legislate in Finance Bill 2018-19 to introduce a new requirement to make a payment on account on capital gains tax following the completion of a residential property disposal which will also extend the existing reporting and payment on account rules for non-UK residents. Following consultation a number of changes will be made including removing non-UK resident companies from the reporting requirement.
Stamp duty land tax (‘SDLT’)
First time buyers and shared ownership
A relief for first time buyers of residential properties costing no more than £500,000 was introduced from 22 November 2017. First-time buyers relief will now be extended (retrospectively to 22 November 2017) to purchases of qualifying shared ownership property in certain cases.
Minor changes to the existing 3% supplement on additional properties
Minor amendments have been made to the further 3% SDLT on additional residential property rules, including an extension to the time period in which the 3% can be reclaimed in certain circumstances. Where the old home is sold after the new home has been acquired, the reclaim period will be extended from 3 to 12 months following the sale of the old home.
Reduction in SDLT return filing deadline
It has been confirmed that there are no changes to the draft legislation in relation to the proposed SDLT filing and payment window reduction from 30 days to 14 days with effect from 1 March 2019.
Additional SDLT for non-residents
The government will publish a consultation in January 2019 on a SDLT surcharge of 1% for non-residents buying residential property in England and Northern Ireland.
The Chancellor has announced a cut in business rates by a third for all retail properties in England with a rateable value of £51,000 or less.
Annual Tax on Enveloped Dwellings (‘ATED’)
The ATED annual charges will rise 2.4% from 1 April 2019 in line with the September 2018 Consumer Prices Index.
If you'd like to discuss any of these areas, please get in touch with your usual PwC tax contact.