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Autumn 2018 Budget

Autumn 2018 Budget: Property, Energy and Environment

Image credit: REUTERS/Phil Noble

Non-resident owners of UK property have known for a while that their world is changing. The Autumn 2018 Budget included confirmation of the extension of UK tax to gains realised by non-residents on the disposal of all UK real property (from April 2019) and the extension of corporation tax to UK property income of non-resident companies (from April 2020). Given the direction of travel, the government’s announcement of an SDLT surcharge on residential property acquired by foreign buyers was hardly surprising. As commentators observed, however, quite what ‘foreign’ means for these purposes, is still unclear. Still, the surcharge is only 1 percent (between 1-3 percent had been trailed).

In the capital allowances arena, what was given with one hand seems to have been removed with the other. The introduction of a new capital allowances relief for expenditure on new commercial buildings and structures was popular, but the reduction in writing down allowances for special pool plant and machinery lamented.

(For Practical Law commentary on measures relating to property, see Legal update, Autumn 2018 Budget: key business tax announcements: Property.)

Read the reaction to the Autumn 2018 Budget from industry leading tax practitioners:

Nick Beecham, Fieldfisher LLP

Foreign buyers of English residential property will be relieved to hear that Theresa May’s announcement on 29 September of proposals to increase, by between 1 percent and 3 percent, the rates of SDLT payable by foreign buyers of English residential property will not take immediate effect. The Red Book merely stated that the government will publish a consultation next January and that the surcharge will be just 1 percent.

The definition of a foreign buyer for the purposes of the surcharge is, as yet, uncertain. It is likely to be based on residency. This will raise interesting questions on how the rules will apply in various scenarios such as for joint, emigrating and immigrating purchasers and purchases by UK trusts and companies ultimately owned by non-UK resident individuals.

Jonathan Cooklin, Davis Polk & Wardwell London LLP

A highly political speech: Brexit was mentioned only once by Philip Hammond, while referencing deal “dividend” three times. The interesting stuff, however, from a corporate tax perspective, is inevitably buried in the budget detail. The jurisdictional creep of the UK tax system continues unabated. The extension of income tax to non-UK residents in, broadly, low tax jurisdictions in respect of income from intangible property related to sales in the UK was expected following consultation (although the form has been somewhat altered). The big announcement, of course, was the proposed introduction of a Digital Services Tax (DST) from April 2020 targeted at big tech organisations, which ostensibly has a relatively narrow focus complete with sunset clause (not sure this is going to smooth a UK/US post-Brexit trade deal). Further assaults on non-residents include the expected extension of tax on chargeable gains in respect of disposals of UK real estate and a consultation on a new SDLT surcharge of 1 percent for non-residents buying residential property. On a different note, the release of the Cryptoassets Taskforce final report, easily overlooked in the plethora of budget announcements, confirms that HMRC’s rather patchwork and out of date guidance in this area is expected to be updated by early 2019.

Jenny Doak, Vinson & Elkins RLLP

The oil industry has not forgotten the unpleasant surprises delivered in previous Budgets. There were murmurs in the press last month that, following the recovery in the oil price after the 2014 crash, the government might try to reverse the ring fence and supplementary charge tax cuts in recent years. The government also faced some criticism of seeking to woo buyers for North Sea assets at the expense of the Exchequer through the introduction of transferable tax history (“TTH”). There was therefore relief when the government reiterated its support for the industry. The introduction of TTH (effective from 1 November) was confirmed, but we will have to wait for the Finance Bill next week to see if the government have ironed out issues (such as the HMRC post-transaction approval process) to make this an effective mechanic to free up M&A for late life assets.

Another item that caught my eye was the unexpected change to stamp duty and SDRT on transfers of listed shares, imposing with immediate effect a targeted market value rule catching transfers between connected companies where group relief is not available. While this is targeted at contrived arrangements, it could have unintended consequences (for example, non-UK mergers or liquidations).

Judy Harrison, Norton Rose Fulbright LLP

The government has announced that it will be maintaining tax rates for North Sea ring fence businesses. This is notwithstanding previous press reporting that the Chancellor intended to increase the tax burden on the North Sea as oil prices have recovered.

The Chancellor also announced a call for evidence on plans to make Scotland a global decommissioning hub and confirmed the introduction of transferable tax history (so that when late-life assets are sold, tax attributes can also be transferred – with the aim that that the buyer can be confident that it will be able to obtain tax relief for the cost of future decommissioning).

These announcements reflect the government’s policy of supporting investment in the UK North Sea and its willingness to engage with industry.

Jonathan Legg, Mishcon de Reya LLP

Whilst not quite kicked into the long grass, the government has clearly rowed back from the headline grabbing announcement of a new “1-3 percent” SDLT surcharge for non-residents. First, it has been confirmed that the charge will only apply to those investing in residential property. Second, the government now seems to be talking about a 1 percent surcharge only—and the fact it will be subject to consultation is welcome. This turn of events is not entirely surprising, especially given the dubious legality of subjecting non-residents to a higher rate of SDLT compared to their UK counterparts, and the inevitable difficulty in defining ‘non-resident’ for these purposes.

Julia Lloyd, Norton Rose Fulbright LLP

A key focus for non-UK resident investors into UK commercial property is the application of the new capital gains tax in the context of a real estate fund, particularly where there could be many layers of tax charged by reference to a single disposal. While we do not yet have the detail of this legislation, we now know that funds that meet the collective investment scheme (section 235 FSMA) or alternative investment fund (AIF) (regulation 3 of the Alternative Investment Fund Managers Regulations 2013 SI 2013/1773) definitions (other than partnerships) will be able to make an election for tax transparency and/or tax exemption at the fund level in exchange for a reporting requirement at the investor level. While we do not have the detail of this yet, it appears that there could be a difference in treatment between investment in some forms of real estate fund, such as a Real Estate Investment Trust listed as an investment company (and therefore an AIF) or one listed as a commercial company (which is not an AIF).

The introduction of a new tax relief for the cost of construction of commercial property is both welcome and unexpected. This move brings the UK into line with other jurisdictions and may help to stimulate investment in new and refurbished buildings.

Alan Rafferty, Freshfields Bruckhaus Deringer LLP

Going it alone with a Digital Services Tax (there cannot be much hope of international consensus before April 2020) seems bold, although it has been clearly trailed. This is not the online sales tax that some, who framed the debate as ‘click vs brick’, had lobbied for. The Treasury has sought to identify particular types of business that derive revenues from UK user participation, but there will doubtless be difficulties with scoping these appropriately.

On the ‘brick’ side of the debate, the news for the property sector seems mixed. Applying the 50 percent carried-forward loss restriction to capital gains will affect the property sector in particular(groups with other non-SSE capital assets will also be concerned). The 2 percent commercial structures and buildings allowance for new constructions may be helpful—but this seems more targeted at the infrastructure sector. More relevant to the property sector is the reduction in writing down allowances for special pool plant and machinery from 8 percent to 6 percent.

The move to tax directly IP receipts of non-UK entities in low-tax/non-full treaty jurisdictions which are referable to UK sales will be relevant across a number of sectors. There may be overlap here with the sorts of transactions HMRC have sought to target using DPT, which itself is undergoing some technical changes.

Changes to the scope of entrepreneurs’ relief will make it harder for PE management to benefit.

Changes to the de-grouping rules for IFAs (broadly bringing those into line with the equivalent CGT rules) announced as part of the Budget might put some transactions on hold until ‘L Day’ (7 November), when those changes come into effect. They also turn equivalent derivative contracts and loan relationship de-grouping rules into outliers, although those can present somewhat different issues.

Elliot Weston, Hogan Lovells International LLP

The Real Estate sector didn’t receive any further nasty surprises in the Budget. No announcement of an indirect SDLT charge (but this still seems a likely bet for 2021) and the corporation tax reduction to 17 percent from April 2020 (which will apply to non-UK resident corporate investors in UK property from that date) stays in place.

The new capital allowance (at a 2 percent straight line rate) for the cost of construction of new commercial buildings (begun on or after 29 October) was a welcome announcement for which the Real Estate sector has long campaigned. As the allowance will pass to a buyer of the new commercial building, the amount of available relief will need to be disclosed by the seller. Buyers of new commercial buildings will need to raise this issue in pre-contract enquiries.

The budget announcement confirms that non-UK residents will be brought within the charge to corporation tax or capital gains tax on direct or indirect disposals of UK property from April 2019 (NRCGT), but there will be special rules for non-UK resident funds (such as Jersey unit trust schemes and AIFs). The detail of the rules for funds will be published on 7 November, but will include an ability for funds that meet certain conditions to elect for exemption (with NRCGT payable by investors in the funds) and for income transparent funds to elect for transparent treatment for NRCGT purposes (if the investors approve).

There will be a new corporation tax exemption for REITs on corporate sales of UK property rich entities.

The budget confirms that corporation tax will apply to non-UK resident corporate investors in UK property from April 2020. One new announcement is that non-UK resident companies will be able to escape the need to register for corporation tax in an accounting period if income tax (at 20 percent) is deducted from their UK property business profits (under the Non-resident landlord scheme) and the company has no chargeable gains in the same period. This might be an attractive option for non-UK resident corporate investors who don’t want to have to register for UK tax.


Read more on the Autumn 2018 Budget

Further analysis on the key areas:


 

Outcome: Spring 2021 Budget—Practical Law’s summary Spring 2021 Budget—Practical Law’s predictions Autumn 2018 Budget: Other business measures Autumn 2018 Budget: Employment Autumn 2018 Budget: don’t let tomorrow’s grey clouds spoil today’s blue(ish) skies Autumn 2018 Budget: IP, Media and R&D Autumn 2018 Budget: Digital Services Tax Autumn 2018 Budget: Finance and Financial Services