UK Budget Update
With the dust now having settled on Chancellor George Osborne's Budget we take a look at the key issues which are most likely to affect or be of interest to our clients and readers.
Changes Affecting Non-UK domiciled UK Residents
Full details of the exact changes to the so-called non-dom regime which will take effect from 6th April 2017 are frustratingly still yet to be published but the Chancellor has helpfully confirmed that non-UK domiciled individuals (non-doms) who become deemed-UK domiciled from that date will receive an automatic rebasing of the base cost of their non-UK assets to their then market value. Non-doms still await in particular clarification of how distributions after 6th April 2017 from their existing offshore trust structures will be taxed.
Further details are still awaited regarding the Inheritance Tax treatment of UK residential property owned through offshore structures after 6th April 2017. A consultation paper which was promised in 2015 has still not been published. It had previously announced that UK residential property owned through non-UK structures will no longer be exempt from UK Inheritance Tax but no further details have been published.
Capital Gains Tax
The general reduction of Capital Gains Tax from 28% to 20% for higher-rate taxpayers (18% to 10% for lower-rate taxpayers) is a significant one although for investors in residential property there has been no reduction and the rate remains at 28% (18% for lower-rate taxpayers). This is consistent with the Government's series of strategic attacks on the ownership of both owner-occupied residential property and residential properties purchased for investment purposes. Interestingly commercial property once again escapes the Chancellor's reach. Gains from carried interest are also subject to the 28% rate (18% for lower-rate taxpayers).
Entrepreneurs Relief has also been extended. From 17th March 2016 non-employees who purchase newly-issued unlisted shares and retain them for at least 3 years from 6th April 2016 will also qualify for a new form of Entrepreneurs Relief (which gives a 10% rate of Capital Gains Tax on gains of up to 10m). Interestingly the new relief is separate from the existing Entrepreneurs Relief so that individuals now have two separate lifetime allowance limits of 10m each.
The differential between the top rate of Income Tax (45%) and the higher (standard) rate of Capital Tax Rate (20%) has risen from 17% to 25% which is a further incentive to invest for capital growth rather than for income.
Capital distributions from offshore trusts which are made on or after 6th April 2016 will now be taxed at rates of between 20% and 32% rather than at rates of between 28% and 44.8%. Whether this will be attractive in the context of the further expected changes to be introduced in 2017 remains to be seen but consideration needs to be given to the timing of trust distributions when the position becomes clear.
Stamp Duty Land Tax
Stamp Duty Land Tax (SDLT) has seen yet another tweak. For anyone buying an additional UK residential property whether a holiday home or a buy-to-let property or even a property jointly owned with a child the rate of SDLT will increase by an extra 3% above the current rates. This applies even if the purchaser's existing residential property is overseas. SDLT on a replacement principal private residence will be exempt from the additional 3% charge provided it is purchased within 36 months of selling the previous principal private residence. Married partners and civil partners will be treated as one unit so if one of them already owns a residential property then the new purchase will attract the new charge.
In the case of commercial property purchases the charging system has changed from a slab system to a slice system. Under the new system the top rate increases from 4% to 5% on that portion of the price which exceeds 250000. However purchases below 1.05 million will pay the same or less in SDLT than under the old system. For commercial property leases the current 1% rate will continue to apply where the net present value of the rent is between 150001 and 5 million and a new rate of 2% now applies where the net present value exceeds 5 million.
Privacy - UK Residential Property Owned By Foreign Companies
On 4 March the Chancellor had announced that he was considering plans to require all foreign companies to have to disclose their ultimate beneficial ownership before they are permitted to own residential property in England and Wales. It is likely that the ultimate beneficial ownership of all existing UK residential property ownerships would also have to be disclosed. No further details have been announced including whether or not the ultimate beneficial ownership would be a matter of public record (or merely disclosed to the UK Land Registry).
Taxation Of Trading In UK Property Development
Probably the most significant announcement affecting those involved in UK property development activities will be the major tightening up on the use of companies resident in double tax treaty jurisdictions (including Guernsey Jersey and the Isle of Man) to shelter profits from trading in UK land from UK taxes. Specifically trading gains derived by treaty country resident vehicles from developing UK land or from gaining planning permission can no longer necessarily rely on treaty protection and will instead be automatically subject to either UK corporation tax (currently 20% but reducing to 17% by 2020) or UK income tax (basic rate 20%) as applicable. Specific and targeted anti-avoidance legislation will be used to negate any tax planning entered into with connected parties which is aimed at avoiding some or all of this new tax exposure.
For those who are deemed to be investing rather than trading in UK property the Capital Gains Tax regime (28% or 18% for lower-rate taxpayers) will continue to apply if the investment is made by an individual irrespective of whether they are resident or non-resident in the UK. If the investment is made via a company then the capital gains would be taxed at 20% (10% for lower-rate taxpayers). Capital gains from commercial property continue to be exempt for all non-resident investors.
For properties which are developed and then retained as an investment with the differentiation between applicable tax rates tax planning will no doubt focus on the precise distinction between trading and investing and also on the exact point when a building site becomes residential property.
We anticipate a continuation of the growing trend for overseas developers to carry out UK land development projects through UK-resident but offshore-incorporated companies with an acceptance that UK corporation tax (17% by 2020) will apply to the net trading profit. The use of debt finance to reduce the effective net profit will inevitably continue although the Chancellor has announced new debt relief limits of 30% of EBITDA which are likely to have an impact.
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