Budget 2017: Changes to commercial property taxation
Significant changes to commercial property taxation were announced in last week’s budget. This initial high-level note is written following detailed conversations with a number of ‘big four’ tax advisers and legal firms.
2 minutes to read
What were the budget announcements?
Capital gains tax exemptions for non-resident landlords will be removed:
The budget proposes the removal of capital gains tax exemption for all non-resident landlords (foreign investors) of UK commercial property. This includes foreign companies, individuals, and JPUTs.
Profit on the sale of property vehicles will face tax:
The budget proposes to tax profits derived by non-residents on the disposal of companies, JPUTs, and other vehicles including REITs and funds, so long as 75% of their gross value comes from UK property.
Changes will be effective from April 2019:
Tax would be levied on the value uplift from that point onwards.
Foreign corporates will pay UK corporation tax:
It is expected they will be subject to corporation tax at 17%. For context, the top rate of corporation tax is currently 38.9% in the US, 34.4% in France, and 30.2% in Germany.
Private individuals will be charged at the normal CGT rate:
For individuals, the top rate of capital gains tax is currently 28%.
Will there be exemptions?
There may be exemptions for overseas institutional investors such as pension and sovereign wealth funds, although this remains subject to the consultation. Vehicles such as REITs that already enjoy exemptions from capital gains tax will continue to do so.
However, it is proposed that gains on the sale of shares in ‘property rich’ vehicles (i.e. where 75% of assets are UK real estate) will be taxed.
Anti-avoidance:
Anti-forestalling provisions have already taken effect to prevent non-residents structuring or restructuring to avoid this tax change.
What are the impacts?
This will be the new normal. The proposals are in consultation until February, meaning there is a small degree of uncertainty over the eventual outcome. However, there is a broad consensus that
- a) material changes to the proposals are not expected
- b) creative structures designed to mitigate the new rules will be unsuccessful
Overseas investors will have an additional cost to factor into their modelling, potentially reducing the amount they are prepared to pay for property today.
A valuation impact:
A practical outcome is that overseas owners will need to have their properties valued at April 2019.
An asset management drive:
Linked to the April 2019 valuation requirement, owners may try to ensure that any value-enhancing activity has taken place before this date, so as to ‘bank’ the capital uplift before it is taxed.
This could cause some to try to bring forward planned capex, or secure pre-leases, for example. Investors claiming capital allowances now will reduce the new tax charges by a greater amount than waiting to claim in 2019/20.
For more information on any of the points discussed in this article, please contact Anthony Duggan or William Matthews .