Apart from a couple of pieces of good news, the Autumn Budget materials published earlier today contain a number of definite and potential changes to UK tax on real estate which could impact on pricing going forward.
The good news in the residential sector is undoubtedly the headline-grabbing reduction in SDLT for first-time buyers. The net effect of the proposal is that any first-time buyer will either have no SDLT to pay on purchases up to £300k, and less SDLT to pay on purchases up to £500k. This is worth up to £5k.
In the commercial sector, the good news is that the so-called 'staircase tax' is effectively being overridden by allowing businesses to ask the Valuation Office Agency to recalculate valuations by reinstating its previous practice in multi-occupancy buildings that applied for business rates purposes before the decision in Woolway (VO) v. Mazars (2015) UKSC 53. Also, no increases in SDLT rates were announced.
However, in the direct tax world, a number of changes are proposed (including changes that are the subject of a consultation announced today) that could have a significant impact, particularly as regards commercial property:
One change is the bringing of capital gains made by non-residents from direct disposals of commercial property into the UK tax net. This will only apply to gains made from April 2019, so gains accruing up to that date should remain outside the UK tax net, but it could impact pricing of deals now for non-UK investors contemplating long-term holds beyond that date. There are, however, promised exemptions for institutional investors such as pension funds.
A second change is expected to come into force in April 2020 and relates to tax on income profits as well as tax on capital gains payable by non-UK resident companies. As regards income profits, non-UK resident companies will become liable to pay corporation tax (not income tax). Although there is a benefit in this insofar as the rate of CT is expected to go down in April 2020 to 17% whilst the income tax rate is expected to remain at 20%, there are disadvantages in the form of restrictions on deductions for financing costs and restrictions on the use of carried-forward losses. This could particularly impact long-term development projects (other than carried on by REITs, pension funds and sovereign funds that enjoy exemptions from tax) in terms of the expected post-tax return. Capital gains will also be brought into the CT net for non-UK resident companies, though of course they will have already been in the UK tax net from April 2019 under the first change mentioned above.
A further change is the proposal that capital gains made by non-UK residents from indirect disposals of UK land will also be subject to UK tax. So, for example, if a non-UK resident holder of shares in a non-UK company or non-UK unit trust sells the shares or units where those shares or units derive 75% or more of their value from UK land and the non-UK resident seller holds at least 25% of the company or unit trust (including in that calculation shares or units held by related parties), UK tax will arise. Again, this will apply only to gains accruing from a rebased value as at April 2019.
Authors: Neil Warriner, Partner and Will Arrenberg, Partner, Real Estate Tax, London
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