The UK Real Estate Tax Landscape is Changing
By Alex Barnes, Memery Crystal LLP
Between October 2018 and April 2020, there are various new changes of which clients need to be made aware. Some of these are anti- avoidance measures, some are to speed up HM Revenue & Customs’ (HMRC) collection of tax and some are new, or extensions to existing, reliefs. There will be opportunities and pitfalls. So, what are the changes?
In order to encourage investment in the construction of new structures and buildings and to improve existing structures and buildings (in the UK and overseas), a new Structures and Buildings Allowance (SBA) has been introduced in respect of contracts for works entered into on or after 29 October 2018.
SBAs can be claimed at 2% per annum on qualifying expenditure, on a straight-line basis, over a 50-year period and will be lost in any year they are not claimed.
The structures and buildings which will qualify for SBAs include bridges, tunnels, offces, hotels, care homes, and retail and wholesale premises.
The person claiming SBAs must be carrying on a qualifying activity which includes a trade, profession or vocation and a UK or overseas property business.
The annual investment limit on plant and machinery will be increased from GBP 200,000 to GBP 1m for two years with effect from 01 January 2019. This should benefit many businesses.
Enhanced capital allowances for assets in the Energy Technology List and the Water Technology List will cease from 31 March 2020. For some, this will be the loss of a very valuable relief.
With effect from April 2019, writing down allowances for integral features (which include electrical systems – including lighting systems, cold water systems and lifts), will reduce from 8% to 6%.
Stamp Duty Land Tax (SDLT)
With effect from 01 March 2019, the time limit for submitting landtransaction returns and paying SDLT is, for many transactions, to be reduced from 30 days to 14 days. This is likely to catch many clients out and there are penalties for failing to make the relevant submission/filing.
For some transactions, the 30-day pay and file time limit is to be retained.
Non-UK residents – Gains tax
From April 2019, direct disposals of non-residential property by non-UK residents are, subject to certain exemptions, liable to UK corporation tax or capital-gains tax, as are certain indirect disposals of interests in both residential and non-residential property.
An indirect disposal will be subject to UK tax where the disposal is of an interest in a propertyrich entity and the person making the disposal has a substantial indirect interest in the entity.
A property-rich entity is one which derives, directly or indirectly, at least 75% of its value from UK land. A person has a “substantial indirect interest” when, at the date of disposal or at any time within two years priors to the disposal, the person either directly, or indirectly through other entities, holds at least a 25% interest (determined by reference to voting rights, income rights, rights on a winding up and proceeds on a sale), in a property-rich entity.
There is an exemption for indirect disposals where the land in question has been used for trading purposes.
For assets not within the charge to UK tax before the introduction of these rules, the default position is that these will be rebased to April 2019, although taxpayers can elect for an alternative basis of valuation if that would be preferable.
For collective investment schemes it is possible for them, through the making of new elections, to retain their tax transparency so that the new gains tax charge is levied only on their investors. Any direct or indirect disposal of UK property must be reported within 30 days following completion of the disposal and a payment on account made at the same time.
UK residents – Capital Gains tax
From April 2020, UK residents will be required to make a payment on account of capital gains tax and file a return within 30 days of completion of a UK residential property disposal. This will, in some cases, mean that the filing and payment obligation falls due up to 21 months before it would under the current rules.
With effect from 01 October 2019, a new VAT reverse charge for certain supplies of construction services by construction businesses to other construction businesses will be introduced. This is part of HM Treasury’s drive to tackle missing-trader fraud in the construction industry. This will fundamentally change how VAT is dealt with in certain construction contracts and will likely increase the administrative burden on many construction businesses.
The reverse charge requires the recipient of the construction services to charge itself VAT and then seek to recover this from HMRC. In this way, the VAT is never paid to the supplier who could then go missing.
The types of construction services covered by the reverse charge are based on the definition of “construction operations” used in the Construction Industry Scheme and so is very wide.
There are some exemptions, but these are limited.
From April 2020, the scope of UK corporation tax will be extended to income received by non-UK corporate residents carrying on a UK property business. Currently offshore landlords are subject to UK income tax on rents.
This will be no doubt be welcomed by some taxpayers who will see tax on their rental profits fall from 20% (which is the current rate of UK income tax payable on rental profits) to 17% (the UK corporation tax rate by April 2020). It will, however, mean that the corporate interest restriction rules and the rules on corporation tax losses will apply, which may be less welcome.
As is evident from the above, there are a lot of changes happening in regard to tax and UK real estate. It is essential that clients are informed of these to maximise the tax effciency of their businesses and to ensure they are compliant with their obligations.
Alex BarnesMemery Crystal LLP, London, United Kingdom
T: +44 207 400 5794
Alex Barnes advises on the tax implications of a wide range of real estate transactions for occupiers, investors and developers (both UK and offshore), and is a regular contributor to publications including Estates Gazette and Property Week.
Memery Crystal is a market leading firm with a strong reputation as a commercial legal practice. Main practice areas include corporate, banking/debt finance, dispute resolution, employment, real estate and tax. The firm has particular in a number of industry sectors, including finance, natural resources, financial services, property, media and technology.
Published: GGI Insider, No. 101, May 2019 l Photo: levranii - stock.adobe.com