The October Budget confirmed a number of items which were announced in 2019 (such as the extension of non-resident capital gains tax) but also contained a new form of capital allowance for the cost of constructing or refurbishing commercial property – a significant development.
Capital allowances for structures and buildings: A new form of capital allowance, relating to the costs incurred in the construction or renovation of commercial property, will be introduced following a period of consultation. The new allowance will be known as the “Structures and Buildings Allowance” (SBA) and it is expected that:
- SBA will be given at the flat rate of 2 per cent per annum over a 50 year period;
- SBA will be available for new commercial structures, including costs for new conversions or renovations;
- The allowances will not be available for the cost of the land itself or for “dwellings” (there will be a consultation on this definition - it is expected that care homes will qualify, but that certain student accommodation will not);
- It will apply to construction contracts entered into on or after October 29, 2018;
- The benefit of the SBA will automatically pass to a purchaser on sale.
As a consequence of this announcement, the special rate of capital allowances will reduce from 8 per cent to 6 per cent from April 2019, while the main rate of allowances will remain at 18 per cent.
Non-resident capital gains tax on commercial property: The Chancellor confirmed that the non-resident capital gains tax regime will be extended to investors in commercial property and widely held residential property for both direct and indirect disposals. The charge will come into effect from April 1, 2019 and will apply to capital gains that accrue and are realised by non-residents after that date. Existing tax exempt investors (such as pension schemes and sovereign wealth funds) will not be subject to the charge.
Real estate funds that are regarded as “collective investment vehicles” will be able to make a tax transparency election (i.e. to look through the vehicle and the investor is treated as holding the land directly) or an election for exemption (so that the fund is not taxed on realised gains, but instead the investors will pay tax when they sell their interest in the fund or on certain other trigger events). The definition of a “collective investment vehicle” is key. The draft legislation was published on November 7, 2018. These changes, together with bringing non-resident landlords into the scope of UK corporation tax on income from April 2020, are significant and both new and existing fund structures should consider their impact.
In addition, certain changes will be made to the way in which UK Real Estate Investment Trusts (REITs) are taxed. Currently, UK REITs are exempt from UK capital gains tax when they dispose of a property held for the purposes of its property rental business, but there is a tax charge if shares in a property owning company are sold. Going forward, it is expected that share sales made by a REIT will also be exempt from capital gains tax. Any gains realised in the structure will be subject to 20 per cent withholding if paid out to investors by way of a Property Income Distribution.
Stamp Duty Land Tax (SDLT): A consultation will be launched in January 2019 to consider introducing a 1 per cent surcharge on non-resident purchasers of residential property.
HMRC as a preferred creditor: With effect from April 2020, HMRC will become a preferred creditor in relation to taxes that are collected by companies on behalf of HMRC. These include PAYE, VAT and Construction Industry Scheme deductions.
For further information please contact Julia Lloyd