Budget 2021 includes a wide range of tax changes and there is a strong emphasis on encouraging capital spend as a route to achieving recovery in the economy. However, the direct benefits of many of the measures for investors in UK property may be limited.
Change to rate of UK corporation tax
It was announced today that the rate of corporation tax will increase from April 2023 to 25% on profits over £250,000. The rate for small profits under £50,000 will remain at 19% and there will be relief for businesses with profits under £250,000 so that they pay less than the main rate. These upper and lower limits will be proportionately reduced for short accounting periods and where there are associated companies. Where the accounting period of the company does not end on 31 March 2023, taxable profits will be apportioned for the purposes of applying the increased rate.
This rate change will impact UK resident companies and also non-UK resident company investors in UK property, given that their UK taxation of property rental business income transitioned from UK income tax to UK corporation tax from 6 April 2020.
From 1 April 2021 until 31 March 2023, certain companies investing in qualifying new plant and machinery assets will benefit from a 130% first-year capital allowance. This upfront “super-deduction” will result in a tax-saving of up to 25p for every £1 spent. Investing companies will also benefit from a 50% first-year allowance for qualifying special rate (including long life) assets. This will have effect in relation to qualifying expenditure from 1 April 2021 but will exclude expenditure incurred on contracts entered into prior to 3 March 2021.
However, there are a number of exceptions to the expenditure that will qualify for this “super-deduction” and the 50% allowance, including plant and machinery that is used for leasing (whether in the course of a trade or otherwise). Therefore, whether investors in real estate will be able to benefit significantly, directly or indirectly, as a result of this announcement, remains to be seen.
Subject to these changes, the main rate of capital allowances on plant and machinery continues to be 18% with the special rate relating to integral features also unchanged at 6%. As announced on 12 November 2020, the temporary £1,000,000 limit for the Annual Investment Allowance will be extended by one year.
Structures and Buildings Allowances are available on qualifying expenditure incurred on or after 29 October 2018. The annual rate of allowances was increased from 2% to 3% (from 1 April 2020 for corporation tax purposes and 6 April 2020 for income tax purposes).
Extended loss carry back
For property investors, there is no ability to carry back property business losses and offset these against taxable income in earlier accounting periods. Companies may carry back excess non-trade deficits (e.g. interest deductions) in certain circumstances, although this is unlikely to apply in the case of a non-UK tax resident company.
In cases where activities are treated as a trade for tax purposes (e.g. a trade of dealing in or developing land), it was announced today that the trading loss carry-back rule will be temporarily extended from the existing one year to three years. This will be available for companies (including non-UK tax-resident companies subject to UK corporation tax on their trading profits) as well as other taxable persons (unincorporated businesses) as follows:
- Unincorporated businesses and companies that are not members of a corporate group will be able to obtain relief for up to £2 million of losses in each of 2020-21 and 2021-22
- Companies that are members of a corporate group will be able to obtain relief for up to £200,000 of losses in each of 2020-21 and 2021-22 without any group limitations
- Companies that are members of a corporate group will be able to obtain relief for up to £2 million of losses in each of 2020-21 and 2021-22, but subject to a £2 million cap across the group as a whole.
Hybrid and other mismatches
The hybrid mismatch rules, which apply to UK tax resident companies and non-UK companies which are subject to corporation tax (eg those carrying on a UK property business or carrying on a trade of dealing in or developing UK land) are aimed at counteracting arrangements that exploit the differences in tax treatments between jurisdictions. In particular, these rules may impact on real estate funds. Following lobbying by industry bodies, and a consultation process, there have been changes to the rules to try to ensure that they work proportionately and as intended.
The proposed changes were first announced in a policy document issued by HMRC on 12 November 2020 that was then subject to further consultation. A further policy document was issued today confirming the changes, which only differ slightly from those announced in November.
In particular, these changes should make compliance with, and managing, the UK hybrid rules significantly more simpler for partnership fund structures.
Taxation of non-residents on disposals of direct and certain indirect interests in UK immovable property
Since 6 April 2019, non-UK residents have been subject to UK tax on capital gains on direct and certain indirect disposals of UK immovable property. Non resident companies (including certain collective investment vehicles which are deemed to be companies) are subject to UK corporation tax. Other non-UK resident investors are subject to capital gains tax.
The indirect disposal rules apply where a person makes a disposal of an entity, in which it has at least a 25% interest (or any interest in the case of a disposal with an appropriate connection to a certain Collective Investment Vehicle (“CIV”)) where that entity derives 75% or more of its gross asset value from UK land.
No changes were announced in today’s Budget, but regulations were laid yesterday following an earlier consultation. One key change resulting from these regulations is that overseas life insurance companies and offshore CIV’s (which are either non-close or meet the GDO condition), and also meet the non-UK real estate condition (i.e. broadly, by reference to its prospectus the UK property is not expected to comprise more than 40% of its investments), will be outside of the scope of the charge where they have a disposal of a less than 10% stake in a UK property rich CIV which is a company. This change is retrospective to 6 April 2019.
This change is welcome, but targeted in its application, and will depend on the particular facts and circumstances in each case.
UK withholding tax on interest payments
UK withholding tax may apply, inter alia, to yearly interest payments made by a UK tax resident company or a non-UK tax resident company which carries on a UK property business if that interest is regarded as “UK source”.
It was announced today that the provisions relating to the EU interest and royalties directive will be repealed.
The repeal will have effect in relation to payments made on or after 1 June 2021, unless the payments are made in “disqualifying circumstances”. Broadly, a payment will be made in “disqualifying circumstances” if it is made with the main purpose, or a main purpose, of securing the provisions being repealed by this clause (that is, to enable a payment to be made without withholding tax on the payment). In such cases the effect of the repeal will take effect in relation to payments made on or after 31 March 2021.
The repeal of these provisions will ensure that companies resident in EU member states will cease to benefit from UK withholding tax exemptions now that the UK no longer has an obligation to provide relief. As a result, EU companies will no longer receive more favourable treatment than companies based elsewhere in the world, and the UK’s ability to impose a withholding tax on cross-border payments of annual interest and royalties will be governed solely by the reciprocal obligations in double taxation agreements.
Stamp Duty Land Tax (“SDLT”)
SDLT applies in relation to acquisitions of property in England and Northern Ireland. Different rates apply depending on the value of the property and whether the property is residential or non-residential.
On 8 July 2020, the Chancellor announced an immediate SDLT holiday until April 2021 on the first £500,000 paid for a residential property in England or Northern Ireland. This has resulted in SDLT savings on residential property costing £500,000 or more of £15,000. The Government had originally stated that this holiday would not be extended. However, following lobbying by stakeholders, the Government has agreed to extend the £500k holiday until 30 June 2021. In addition, the nil rate band will not immediately revert to the previous level of £125k from 1 July 2021; instead the nil rate band will be maintained at £250k until 30 September 2021, after which it will revert to £125k.
In addition, the existing 3% additional dwelling supplement for buyers of second homes, corporate buyers and other property investors will remain. Further, the additional 2% foreign buyers surcharge will apply to residential property acquisitions from April 2021.
As previously confirmed, a 2% SDLT surcharge will apply to non-UK residents purchasing residential property in England and Northern Ireland from 1 April 2021.
The additional 2% SDLT will apply to both non-resident individuals and non-natural persons (e.g. companies, trusts, partnerships), and will apply in addition to the existing SDLT rates of up to 15%.
A number of VAT changes were announced today.
The 5% reduced rate of VAT for tourism and hospitality will be extended to 30 September 2021. To transition back to the standard 20% rate, a 12.5% rate will apply for the subsequent six months until 31 March 2022.
The VAT registration threshold is to be frozen at £85,000 until 31 March 2024.
Any business that took advantage of the original VAT deferral on VAT returns from 20 March to 30 June 2020 can now opt to use the VAT Deferral New Payment Scheme to pay that deferred VAT in up to eleven equal payments from March 2021, rather than one larger payment due by 31 March 2021, as originally announced.
A new regime for late VAT returns and payments will be introduced from 1 April 2022.
The new late submission regime will be points-based, and a financial penalty will only be issued when the relevant threshold is reached. The new late payment regime will introduce penalties proportionate to the amount of tax owed and how late the tax due is. The government will introduce a new approach to interest charges and repayment interest to align VAT with other tax regimes.
The Chancellor has extended the existing rates relief available to tenants. The reliefs are available for eligible retail, leisure and hospitality businesses until July 2021 and will continue to discount business rates bills in these sectors by up to two thirds after this, until March 2022.
The extension of relief is tailored and primarily targeted at smaller and medium sized businesses who have been forced to close, being capped at £2m of relief for businesses that were required to be closed on 5 January 2021, or £105,000 per business for other eligible properties. However, where the property is vacant and the liability to pay business rates falls on the landlord, no specific reliefs apply.
Incentives to encourage investment in Freeport tax sites
A number of tax reliefs have been announced to encourage investment in Freeport tax sites. In broad terms these include an enhanced 10% rate of Structures and Buildings Allowance for constructing or renovating non-residential structures and buildings, an enhanced capital allowance of 100% for companies investing in relevant plant and machinery, relief from Stamp Duty Land Tax on the purchase of land or property within Freeport tax sites in England and Business Rates relief in Freeport tax sites in England, once designated.
If you would like to discuss any of these issues further, please get in touch with your usual PwC contact.