Following the publication of Finance Bill 2016, we consider its impact and other key measures affecting the real estate sector.
SDLT and residential property
Companies, individuals and trusts purchasing residential properties for more than £40,000 will be required to pay an extra 3 per cent SDLT from April 2016. The extra 3 per cent SDLT is not applicable where an individual, and in certain circumstances trusts, do not already own a residential property. Relief is also available where an individual is replacing their existing main residence. However, a relief originally proposed for portfolio investors acquiring 15 or more properties will not be enacted.
Buy-to-let investors continued to be a target for the Chancellor as this measure means it will be more expensive for them to acquire properties.
SDLT and commercial property
Purchasers of commercial property are now subject to SDLT rates of up to 5 per cent on acquisitions for more than £250,000. Although the calculation of the SDLT liability will be based on bands rather than the highest rate of consideration, the measure will only benefit purchasers of non-residential property with a cost of less than £1.05m.
In an effort to raise more tax, the Chancellor has taken the opportunity to raise the SDLT rates for commercial investors. It is likely the market will suffer adjustments in pricing to absorb the additional SDLT.
Capital gains tax
Capital gains tax has been reduced by 8 per cent on most gains. Although commercial investors will benefit, the reduction has not been extended to residential property (located in or outside the UK) and recipients of carried interest which are still subject to rates of up to 28 per cent.
This has been welcomed by investors in commercial property, but investors in buy-to-lets have been excluded from the benefit.
Repairs and renewals
Replacement of the 10 per cent wear and tear allowance on buy-to-lets has finally been withdrawn. Instead, the cost of replacing furnishing is now deductible against rental income. Where the replacement is not substantially the same as the old item, the deduction is limited to the amount that would have been incurred on the same item.
The Finance Bill removes the previous beneficial regime and replaces it with a reasonable alternative, although detrimental to the buy-to-let sector.
Other ongoing measures not in the current Finance Bill
Offshore dealers and developers of UK land
The Chancellor announced that measures would be introduced in the Finance Bill to ensure offshore dealers and developers pay UK tax on profits generated from UK property transactions. The current draft bill does not yet include these clauses, although it is expected that they will be included at a later stage. Offshore dealers and developers have favoured the Channel Islands and the Isle of Man due to their treaties with the UK, being used to shelter profits from UK tax. These treaties now ensure the UK is able to charge tax on profits and gains arising from the disposal of UK land.
This measure was unexpected and sudden. It is anticipated to significantly impact offshore traders in UK property and the fiduciary industry. Additionally there is concern that with a move to taxing profits under corporation tax rather than income tax, unrealised profits may become subject to UK tax.
Restriction of interest deduction
Only limited information has been provided on the proposed restriction of interest deduction to 30 per cent of EBITDA from April 2017.
The property industry is concerned that the restriction will apply to third party debt and also to non-resident landlords. The lack of clarity has meant that the property industry, which makes decisions based on long term modelling, is unable as yet to properly assess investment and refinancing opportunities.
The increasing level of taxation of the real estate sector is leading to many international investors reconsidering whether the UK is a suitable location to invest. This will have an impact on the UK economy with investors looking to other jurisdictions which have less tax leakage.
If you would like any further information on these issues please contact Adrian Benosiglio.