Following a decision made in 2016, the Corporation Tax rate was due to reduce to 17% for the financial year beginning 1 April 2020. However, as indicated within the last few months, it has been confirmed in Budget 2020 that the Corporation Tax main rate for the financial year beginning 1 April 2020 will remain at 19%. Legislation in Finance Bill 2020 will set the rate at 19% for this year and the financial year beginning 1 April 2021.
This is significant for non-resident corporate landlords who, following the changes introduced in Finance Act 2019, will be brought within the scope of corporation tax in respect of the profits of their UK property business from 6 April 2020 (rather than being subject to income tax, which applies for periods prior to 6 April 2020). There was to be a meaningful difference in the tax rates which will apply (the income tax rate is 20% and the corporation tax rate was expected to be 17%). The tax rate differential is now more marginal, and corporate non-resident landlords being brought into corporation tax means that they will be subject to corporate restrictions on the deductibility of interest.
Hybrid and other mismatches
The hybrid mismatch rules, which are aimed at counteracting arrangements that exploit the differences in tax treatments between jurisdictions, impact on a number of real estate clients (particularly funds). Following lobbying by industry bodies, it was announced in the Budget that there will be a consultation (detailed of which are not yet published) on these rules to seek to ensure that the hybrid mismatch rules work proportionately and as intended.
Capital loss restriction
As previously announced, a restriction on the relief for capital losses (for corporation tax purposes) has been introduced from April 2020 so that companies making capital gains will only be able to use carried forward capital losses to offset up to 50% of those gains. The existing £5 million ‘de minimis’ in respect of income losses will apply to income losses and capital losses in aggregate, and on a group basis.
During the consultation on the detailed design of the rules, certain issues were raised, and in the Budget it was announced that changes aimed to resolve some of these issues. These include excluding certain companies in liquidation from the scope of the restriction and allowing the offset of carried-forward capital losses against chargeable gains without restriction during the period of official liquidation. Otherwise such companies would not receive a deduction for commercial losses.
Since 6 April 2019, gains accruing to non-UK tax resident companies on direct and certain indirect disposals of UK property are subject to UK corporation tax. Such companies will therefore also be subject to this restriction. Companies which have one-day accounting periods purely as a result of chargeable gains will be able to claim to access the full £5 million deductions allowance over a financial year in addition to being able to offset allowable losses against other chargeable gains accruing during the same financial year without restriction.
Other changes in relation to corporate non-resident landlords
Some further changes were announced in the Budget to address a number of administrative and transitional issues, including provisions to allow relief for financing costs incurred within the preceding 7 years where a property rental business commences on or after 6 April 2020.
Structures and Buildings Allowance
In the Budget it was announced that there would be an increase to the annual rate of the Structures and Buildings Allowance (SBA) which will be introduced in Finance Bill 2020. The annual rate will increase from 2% to 3% from 1 April 2020 for corporation tax purposes and 6 April 2020 for income tax purposes.
Review of the UK funds regime
The government has announced that it will undertake a review of the UK’s funds regime during 2020 and will consider, amongst other things, whether there is a case for changes to the tax treatment of companies used by funds to hold assets to make the UK a more attractive location for these companies.
It will also consider the VAT treatment of fund management fees and other aspects of the UK’s funds regime
Representations have been made to the government that the UK corporation tax rules act as a barrier to the establishment in the UK of holding companies within certain investment fund structures. Real estate funds, for example, commonly invest in real estate assets through one or more intermediate companies located in countries that avoid additional layers of tax as property returns are realised and passed back to the fund and its investors.
Measures to be consulted on to improve the position of the UK include further potential extensions to the Substantial Shareholding Exemption, creating a more comprehensive exemption (via a broader participation exemption) and consideration of the tax treatment of rental income flows through a UK based asset holding company in a real-estate fund (including the potential extension of the REIT regime).
Annual Tax on Enveloped Dwellings (ATED)
The ATED charges have increased in line with inflation as in previous years.
The Budget has announced new reliefs from the ATED charge and the 15% rate of Stamp Duty Land Tax (“SDLT”) for certain qualifying housing cooperatives.
Non-UK resident Stamp Duty Land Tax surcharge
The government has confirmed in today’s Budget that it will introduce a 2% SDLT surcharge on non-UK residents purchasing residential property in England and Northern Ireland from 1 April 2021.
The proposal was first announced by Theresa May at the Conservative party conference in September 2018, and in February 2019 HMRC and the Treasury issued a consultation document in respect of a 1% SDLT surcharge for non-UK resident purchasers of residential land.
If the 2% surcharge is structured along the lines of the proposal in the 2019 consultation, it is expected that the additional 2% SDLT would apply to both non-resident individuals and non-natural persons (e.g. companies, trusts, partnerships), and would apply in addition to the existing SDLT rates of up to 15%.
Construction Industry Scheme (CIS)
In the Budget the government announced its intention to introduce legislation in Finance Bill 2020-21 to prevent non-compliant businesses from using the CIS to claim tax refunds to which they are not entitled. The measure will allow HMRC to reduce or deny the CIS credit claimed on employer returns where the sub-contractor cannot evidence the deductions and does not correct their return when asked.
It will also simplify the rules covering deemed contractors, clarify the rules on allowable deductions for expenditure on materials, and expand the scope of the penalty for supplying false information when registering for CIS.
The government will also publish a consultation on how to promote supply chain due diligence, including ideas for tackling fraud in supply chains.
There was a boost for many small businesses to counter the effects of the Coronavirus outbreak. Measures include:
- Business rates retail discount – The government has already announced that, for one year from 1 April 2020, the business rates retail discount for properties with a rateable value below £51,000 in England will increase from one third to 50% and will be expanded to include cinemas and music venues. To support small businesses in response to COVID-19 the retail discount will be increased to 100% and expanded to include hospitality and leisure businesses for 2021.
- Business rates pubs discount – The government previously committed to introducing a £1,000 business rates discount for pubs with a rateable value below £100,000 in England for one year from 1 April 2020. To further support pubs, in response to COVID-19 the discount for pubs will be increased to £5,000.
The measures are intended as an ‘exceptional step’ and will help these businesses ride the storm for the next financial year. The government will expand the current retail relief to increase to the leisure and hospitality sectors. An increase to the planned rates discount for pubs to £5,000 has also been announced.
A fundamental review of the rates system was also announced, including improvements to the current system from 2021, longer term reforms to the system, how to improve administration of the tax and exploring alternatives to business rates.
If you would like to discuss any of this further please get in touch with your usual PwC Real Estate tax contact.