As part of Budget 2016 the UK Government has announced changes to the UK tax regime to make profits from trading in and/or developing UK land subject to UK tax. The changes will take effect from a date later in the year to be confirmed (possibly in October) but with special rules to prevent steps being taken between now and then to avoid the new charge.
Currently, a non-UK tax resident company is only liable to pay UK corporation tax on the profits of a trade carried on by it through a permanent establishment in the UK. The proposed changes extend the scope of the UK tax rules so that non-UK tax resident companies with profits from trading in and/or developing UK real estate will be liable to pay corporation tax irrespective of whether that company has a UK permanent establishment. Equivalent rules will be introduced to ensure that individuals are subject to UK income tax on such trading profits.
These changes will affect offshore ownership structures that relied on the terms of the UK's tax treaties with Jersey, Guernsey and the Isle of Man, which (a) defined 'permanent establishment' without specific reference to building sites, and which (b) did not include express provisions to preserve the UK's right to tax profits from land situated in the UK. Each of these treaties has been amended to achieve that effect.
What does this mean?
This move was unexpected. Whilst it will no doubt cause some offshore traders in and/or developers of UK real estate to become liable to UK corporation tax (particularly those located in Jersey, Guernsey or the Isle of Man), many offshore structures were in the process of being wound down anyway as a result of the introduction of the UK's diverted profits tax in 2015.
The change further erodes the territorial scope of UK tax on real estate; other recent measures having this effect include the introduction of the annual tax on enveloped dwellings (ATED) in 2013 and extensions of the charge to capital gains tax to non-UK tax resident individuals in 2013 and 2015.
Offshore developers should consider seeking professional advice to determine how the new rules will apply to them and whether action should be taken to unwind existing structures. The new rules will have a limited effect (and in many cases no effect) on UK tax resident companies that are already fully within the charge to corporation tax on property development.
Other notable Budget announcements relating UK real estate
Stamp duty land tax on commercial real estate
- With immediate effect, stamp duty land tax (SDLT) on commercial real estate purchases will be charged as follows: 0 percent for the part of price that falls between zero and GBP150,000; 2 percent for the part between GBP150,001 and GBP250,000; and a new 5 percent rate will apply above GBP250,000.
- A new SDLT rate of 2 percent will apply for leasehold rent transactions where the net present value is above GBP5 million.
- Investors in residential real estate will be disappointed that the Government will not exempt large-scale purchases of at least 15 properties from the 3 percent higher rate SDLT charge for additional/second properties, which will apply from 1 April 2016.
Change to capital gains tax rates
- The higher rate of capital gains tax for most assets will be cut from 28 percent to 20 percent, whereas the basic rate will be cut from 18 percent to 10 percent. However, there will be an 8 percent surcharge for gains on residential property to encourage investment into companies rather than into buy-to-let property.