Autumn Budget 2017: Property Tax
The first autumn Budget for many years saw some major announcements for the UK property sector.
The much publicised UK housing shortage received major attention. A raft of government interventions were announced on future funding and planning, in an attempt to address the housing crisis. There is significant detail to be digested on these measures, and on some major tax changes that take immediate or imminent effect:
Taxation of capital gains made by non-residents from April 2019
Non-UK resident funds, companies and individuals investing in commercial property in the UK will pay tax on gains on increases in value from 1 April 2019. The limited exemptions currently available on gains made by non-UK residents on the disposal of UK residential property will also be largely removed.
Property values will be rebased to shelter gains made up to April 2019. If the original price is greater than the April 2019 value, there will be an option to use this as the ‘base value’ for tax purposes.
These tax charge on UK commercial property will also apply to the disposal of “property rich” companies holding residential or commercial properties. A company will be “property rich” where more than 75% of its gross value is represented by UK property but the tax charge on these “indirect” disposals of UK real estate will only apply where a person (or connected persons) have a 25% interest in that company.
This is massive news for the commercial property sector. Much UK commercial property is held offshore, with gains not currently subject to UK tax. In addition, individuals using corporate structures to hold UK residential properties were, until now, able to avoid the 2015 tax changes by selling shares in the company owning the property instead of the property itself.
The new rules will lead to a significant change in holding structures and the market generally. Offshore funds and other overseas owners of UK properties will need to seek immediate advice on how these changes will impact on their future tax liabilities and the returns to their investors and shareholders.
SDLT relief for first-time buyers
Bowing to pressure, the Chancellor has announced an exemption from SDLT for first-time buyers. No SDLT will be payable on properties priced up to £300,000, with a reduction in rates for properties costing between £300,000 and £500,000. Above £500,000 the calculation of SDLT will revert to current rules on the entire consideration.
KS comment: This will be welcomed, and is worth £5,000 to qualifying first-time buyers. The sting in the tail however is the £500,000 limit after which SDLT calculation reverts to the current system – for a qualifying property priced at £500,001 the £5,000 saving is fully and immediately lost. In London particularly, there are plenty of first-time buyers who will spend more than £500,000 and therefore not benefit.
Removal of Indexation Allowance from January 2018
Companies selling a property can currently reduce the gain chargeable to tax by claiming indexation allowance up to the date of sale. These claims will be frozen from December 2017, meaning that the tax liabilities of companies will increase in the future – the exchequer forecasts an increase in tax revenues of £165 million in 2018-19, and additional taxes of £525 million in 2022-23.
KS comment: Companies owning properties which are surplus to requirements will be assessing their total investment returns, net of tax, and reviewing their investment strategies. This measure might release properties into the market, triggering opportunities for investors with funds.
Annual tax on enveloped dwellings (ATED) increased
ATED, which is payable by companies owning UK residential property, will increase by 3% from 1 April 2018.
This is not unexpected and is pegged to the CPI value from September 2017.
SDLT payment window shortened
From 1 March 2019 SDLT will need to be paid within 14 days of transaction completion.
This reduction from the current 30 day window has been trailed previously, but we now know when it will kick in. We understand that improvements are planned for the current SDLT return process to help accommodate the shortened filing deadline.