Tax in a Time of Uncertainty
In 2016, most people in the UK have been distracted by the referendum on whether to stay in the EU and its aftermath. For tax practitioners, and those interested in the real estate industry, there have been a number of other distractions, namely a raft of tax changes and proposals which would, if enacted, have a profound impact on the way real estate is held, managed, and taxed in the UK. This article will highlight and discuss the most significant of these, namely the UK’s reaction to BEPS actions 4 and 7, and consultations on updating and broadening our participation exemption and on increasing the transparency of UK property ownership.
For many years the tax climate for investment, particularly from overseas, into UK real estate has been relatively benign. Such investors paid a rate of tax on rental income lower than corporate tax rates, after being able to deduct arm’s length finance costs and some items of depreciation. Profit on the sale of the investments was exempt from UK tax. Acquisition taxes were modest by international standards and there were no annual wealth taxes levied on property other than very low rates of local tax. Over the last five years this climate has changed completely, and is much more complex and unsettled, particularly for residential property. The table opposite highlights the main changes for residential real estate.
These changes, although motivated by a tax avoidance and political agenda, have had a direct impact on institutional and fund investors and have also induced changes to the way commercial property is taxed. This year, for example, the rates of transfer tax on commercial property
acquisitions and leases have finally been increased after years of increases only to the rates for residential property. When budgets are under pressure, these changes show that property taxes are a good way to raise revenue in an age of mobile work and capital.
In addition, of course, the UK government has been a leading player in progressing the BEPS agenda, and is firmly committed to implement the agenda in full. It has already drafted provisions to enact the anti-hybrid work as a result of Action 2; these rules will take effect from 1 April 2017.
REflexions issue 4 - October 2016
REflexions is a bi-annual digest, dedicated to the real estate investment management professionals, which brings you the latest articles, news and market developments from Deloitte’s professionals and clients.