The Chancellor’s budget last week has been largely viewed as a business-friendly budget but it also contained some surprise announcements particularly for those who invest in, acquire and develop both residential and commercial property.
The key announcements included:
- Reduce the rate of corporation tax to 17% from 2020.
- Reduce the threshold for business rates.
- Reform of corporation tax losses.
- Reduce the higher rate of Capital Gains Tax from 28% to 20% and the basic rate from 18% to 10% from April 2016 (except for residential property and carried interest).
- Extend entrepreneurs’ relief to long term investors in unlisted companies.
- Abolishing Class 2 National Insurance, for self-employed.
- A new rebasing relief will be introduced for non-UK domiciled individuals who will be deemed UK domiciled in 2017.
- ISA allowance will rise from £15,240 to £20,000 in April 2017.
- The additional 3% Stamp Duty Land Tax (SDLT) charge for additional residential properties will be introduced and will also apply to larger investors.
- New Stamp Duty Land Tax calculation will apply to commercial property acquisitions.
Additional SDLT charge
From 1 April 2016, an additional charge to SDLT will apply to purchases of additional residential properties, such as second homes and buy-to-let properties. The additional charge will be 3% above the current SDLT rate and will apply to purchases of additional residential properties in England, Wales and Northern Ireland.
The additional charge will apply for significant investors and corporate investors. There will be an exemption from the additional rate if a property is bought to replace a main residence, wherever located, which is sold within 36 months. However, the additional charge will need to be paid first and then refunded once the main property is sold.
All residential properties acquired by companies will be subject to the new higher rate, unless the acquisition is already subject to the 15% SDLT rate for non-natural persons, in which case the rate remains at 15%.
All residential properties acquired by trusts will be subject to the new higher rate, unless the trust is a life interest trust where the life tenant does not own a residential property personally.
There will be transitional rules, such that if contracts were exchanged prior to 25 November 2015 then these should be protected against the charge even if completed after 1 April 2016.
These new measures have been introduced no doubt in an effort to keep the buy-to-let market under control. The increased SDLT charge will mean considerable additional costs for overseas investors into the residential market (where they already own a property elsewhere) and particularly for buy-to-let portfolio investors.
Stamp duty on commercial property
A new rates and banding system of SDLT similar to the one introduced for residential property in 2015 will take place to the taxation of non-residential property transfers.
Under the new system, where the consideration exceeds the threshold, only the excess will be subject to the higher rate of SDLT.
The new bands are noted below
Click here to view table
This means an increase of 25% in the SDLT payable on most commercial properties in London which represents a significant business cost increase for the acquisition of commercial premises.In addition, the rate of SDLT on non-residential leases will be increased to 2% where the net present value of the rent is £5million or more.
Offshore property developers
Non UK residents are subject to UK tax on trading profits which arise from the development of UK property. However, many double tax treaties restrict this so that UK tax only arises to the extent that there is a permanent establishment in the UK.
With effect from 16 March 2016, the double tax treaties with Guernsey, Jersey and the Isle of Man have been amended so that trading profits which arise from property development are subject to UK tax even where there is no permanent establishment in the UK. These jurisdictions are commonly used to undertake property development in the UK, due in part to the double tax treaties.
In addition, the rules will be extended so that UK tax also arises where:
- The company undertaking the property development pays a fee to a related party which reduces the profit arising from the development itself.
- The profits from development of UK property are realised indirectly, from the sale of shares in a company which owns the property.
New rules will be introduced with effect from April 2017 to cap the amount of relief for interest to 30% of taxable earnings in the UK or based on the net interest to earnings ratio for the worldwide group.
The rules will include a threshold limit of £2 million net UK interest expense and provisions for public benefit infrastructure.
The motivation for this measure would appear to be tax equalization but these proposals could be a major issue for businesses where significant debt levels form an integral part of the business model.
Entrepreneurs’ relief will be extended to long term investors in unlisted companies.
The 10% rate of CGT will apply on gains on newly issued shares in unlisted companies purchased on or after 17 March 2016, provided they are held for a minimum of three years from 6 April 2016, and subject to a separate lifetime limit of £10 million of gains.