INTRODUCTION

Budget 2016 included a number of tax measures that were not trailed in the media, including some surprising measures targeting profits realised by offshore property developers.

The trend of encouraging onshore investment into the UK continues, with an even lower headline corporation tax rate announced. An overview of some of the most important changes relating to UK real estate and affecting corporate taxpayers is set out below.

STAMP DUTY LAND TAX

Commercial property

The stamp duty land tax rates on non-rental consideration for non-residential property were reformed with effect from midnight on Budget Day (16 March 2016). The old "slab" system is being replaced by a "slice" system (which is the system already in place for residential property), meaning that the consideration for a property will be taxed according to how much of it falls within a particular band, rather than the entire consideration being taxed at one rate.

On the basis of the new rates, purchasers paying consideration in excess of £1,050,000 will pay more SDLT under the new rules than under the previous rules. The new rates are as follows:

Click here to view table.

In addition, a new 2% rate of SDLT will apply to rent on non-residential property with a net present value above £5 million. 

Both of these changes took effect from midnight on 16 March 2016. Where a contract was entered into before that time, the old rates will continue to apply provided that, broadly, the contract terms are not varied and no assignment or other sub-sale takes place in respect of the contract.

Residential property

Institutional investors will be disappointed to learn that there is no exception from the 3% additional rate of SDLT for second homes and buy-to-let investments. The top rate of SDLT for purchases of residential property by non-individual buyers is now therefore 15%. The 15% SDLT rate for purchasers who are non-natural persons will continue to operate alongside these new rates and is not affected by the changes. For more detail on the 3% additional SDLT rate, please refer to our briefing note here.

PROPERTY DEVELOPMENT AND TRADING BY OFFSHORE ENTITIES

The Jersey, Guernsey and Isle of Man double taxation agreements with the UK were amended with immediate effect on 16 March 2016 to allocate taxing rights to the UK in respect of income profits and capital gains realised from UK real estate. In each case, the UK has taxing rights without reference to the residence of the company realising the profit or whether it trades in the UK through a permanent establishment. The accompanying explanation states that this change removes "a potential loophole that may have allowed non-UK resident property developers to avoid income tax or corporation tax in the UK".

In addition, new domestic legislation has been announced that will target offshore property trading and development planning by non-UK resident companies. A specific corporation tax charging provision will be implemented that taxes profits from disposals of the UK property by non-UK resident companies. A specific corporation tax charging provision will be implemented that taxes profits from disposals of UK property by non-UK residents, irrespective of whether the non-UK resident company trades through a permanent establishment in the UK. The new rules will apply to (i) dealing in any estate, interest or right in or over land in the UK and (ii) developing (or redeveloping) any land in the UK with a view to disposing of any estate, interest of right in or over UK land. Non-UK resident property traders and developers will therefore both be affected.

According to the technical note published by HMRC, the full profits of the company will be subject to UK corporation tax. In addition to a targeted anti-avoidance rule that tackles general planning and forestalling (including any attempts to "rebase" the property prior to June 2016), there will be specific rules aimed at:

  1. preventing artificial fragmentation of activities between companies that are economically connected; and
  2. counteracting planning that seeks to employ the use of multiple company envelopes (which are all individually investing) to avoid the realisation of trading profits on the disposal of the shares in the companies.

The detail of these rules is subject to consultation that closes on 29 April 2016.

It is likely that existing structures will be affected by these rules, and restructuring may be required in some circumstances. Please contact us if you think your structure may be affected by these changes.

LOWERING THE UK CORPORATION TAX RATE

The government has continued the trend of incentivising investment in the UK through onshore vehicles in this Budget, with an even lower corporation tax rate of 17% announced. This new rate will take effect from 1 April 2020 instead of the previously announced 18% rate. The corporation tax rate is set to fall from 20% to 19% on 1 April 2017.

This measure is likely to increase the UK's attractiveness as a holding company jurisdiction, pursuing the government's aim of "creating the most competitive tax regime in the G20", and may sweeten the otherwise extremely bitter pill for offshore property developers in this Budget.