Tax authorities love property. Corporate profits are intangible, individuals can cross borders and taxing the shadow economy is like grasping at, well, shadows. But you know where you are with property. It’s immovable. You can see it. Value it. Send tax demands to the occupiers. And the tax opportunities! Tax on rents. Tax on gains. Stamp duty on acquisition. Council tax or business rates. VAT. From a tax inspector’s perspective, what’s not to like about property?
So it shouldn’t have come as a surprise when yesterday, after years spent increasing the tax yield from residential property, the Chancellor turned his attention to commercial property.
Stamp Duty Land Tax
From midnight on 16th March 2016, the Chancellor reformed the stamp duty land tax (SDLT) charge for non-residential property. SDLT is now as follows:
- 0 per cent on £0 - £150,000
- 2 per cent on £150,001 - £250,000
- 5 per cent on £250,000+
For grants of new leases, SDLT increases from 1 per cent to 2 per cent where the net present value of the rent exceeds £5m.
There will be winners and losers. Once the price exceeds £1.05m, more tax will be payable on the purchase of commercial property. This will increase the SDLT charge for many purchasers by almost 25 per cent. On a £50m non-residential property, the SLDT will be almost £500,000 higher, at £2.49m compared to £2m.
This change is anticipated to raise nearly £1.5bn in the next three years and £2.5bn in five years.
Interest relief on finance costs
The government will implement its proposal to restrict relief for finance costs such as interest, to:
- 30 per cent of EBITDA, or
- a figure linked to the interest-to-earnings ratio of the worldwide group.
The measures address internal and external borrowing and further disclosure of non-resident structures will be required if claims are above the 30 per cent ratio. There is a £2m interest expense de minimis, which will aid some.
This will have a significant financial impact on the property sector, which is typically highly geared, and it will place increased pressure on cashflow.
Capital gains tax rates will be cut from April 2016 to 20 per cent for higher rate tax payers and 10 per cent for basic rate payers. This reduction will not be available for gains on residential property. We await the exact details of the changes but this reduced capital tax rate appears to be available for commercial property. This could increase the appeal of commercial property to wealthy individual investors.
The government plans legislation to ensure that offshore structures cannot be used to avoid UK tax on profits generated from developing UK property. They will be creating a 'taskforce' to look into this. The measure is aimed at Isle of Man and Channel Island companies which currently benefit from treaty relief. We await further details on this.
The Chancellor also announced changes to business rates relief. The annual threshold for small business tax relief is to be raised from £6,000 to a maximum of £15,000 and the higher rate from £18,000 to £51,000, exempting 600,000 firms. Does this go far enough?
If you would like to discuss any of these points further, please contact George Bull or your usual RSM contact.