Retention of the current 19% corporation tax rate.
This will require a reversal of the law which currently has the rate reducing to 17% for the financial year from 1 April 2020. Notably, this change will also affect non-resident corporate landlords (NRCLs), who will come into the UK corporation tax net from 6 April. While the headline rate itself is only marginally different from the current 20% income tax rate, potentially, for many NRCLs (eg those with debt funding) the change of regime could have substantially wider implications meaning a higher effective rate of tax than at present.
3% additional SDLT surcharge on purchases of residential property by non-residents.
This means a new effective top rate of 18% for purchases of dwellings by non-UK residents. Query whether we will see any exemptions for those in the BtR sector or whether, in practice, institutional and other investors acquiring portfolios will need to rely on commercial rates to avoid the new more penal charge going forward. See below for further information.
Changes to "IR 35"
This change is relevant to the many businesses in the sector who use consultants and other providers through personal service companies (PSCs). The change will move the obligation to account for PAYE and NIC obligations from the PSC to client (or other fee payer), should the role be deemed to be one of employment for tax purposes. Helpfully, there has been clarification that it only applies to services supplied after 6 April 2020. HMRC have recently confirmed that clients that are "wholly overseas" with no UK presence will be excluded from the new off-payroll working regime – PSCs working for such organisations will have to apply the existing IR35 rules. We will have to wait until the Finance Bill is published on 19 March to see the detail of this exclusion. HMRC have also stated that they will take a light touch approach to penalties in 2020/21. While many are now well prepared, those who have not yet been taking appropriate action have not long now to get ready. See below for further information.
Increase in Structures and Buildings Allowance (SBAs)
This applies to certain commercial property from 2% to 3% per annum. Notably, these do not apply to residential property, serviced apartments or care homes, which, given the need for more expenditure in this area, is a bit of a shame. (One for the wish list). Where applicable, these allowances may benefit NCRLs looking to offset potentially increased tax costs as a result of coming within the corporation tax regime. The allowances are however ultimately only a cash flow benefit as, if the property is later sold, the allowances claimed are added to the disposal consideration.
Non-resident Corporate Landlords
(See also retention of the current 19% corporation tax rate above). Already on the statute book, it seems that the implications of this apparently innocuous change are widely underestimated. As indicated above, the move does not just mean a change from income tax at 20% to corporation tax at 19%. The effect of the change will be, potentially, to bring NRCLs into a host of anti-avoidance and BEPS driven initiatives (e.g. through new restrictions on tax deductions for interest and hybrids and certain brought forward losses), that could impact on anticipated returns and commercial positions, with implications for the viability of existing structures for some. See below for further information.
VAT exemption on fund management fees for certain UK REITS from 1 April.
This follows on from an EU case, Fiscale Eenheid X, which deemed supplies of fund management to certain collective investment schemes (including those holding real estate) to be VAT exempt. While, to date, HMRC have allowed certain listed funds, which met the conditions of the case to decide voluntarily whether or not to apply exemption, regulations have recently been introduced to make the exemption mandatory from 1 April 2020. Those potentially affected e.g. fund managers and REITs will be considering the issue with care.
Final Period Exemption from Private Residence Relief (PRR) to be reduced and PRR lettings relief to be restricted.
PRR is available as a relief from CGT on disposal of a property which has been occupied by an individual as their only or main residence. Provided such property was at some point occupied as the individual's main residence, the current PRR rules also provide for a "final period exemption", which enables the individual to treat their final 18 months of owning a property (regardless of whether the individual was living there during this time) as a period in which it was their main residence. This relief is to assist those who move home but are unable to sell their old property immediately. In the Autumn Budget 2018, it was announced that the final period exemption would be cut from 18 months to 9 months, with effect from 6 April 2020. Notably the period used to be 3 years and many are not aware of the current 18 month reduction – never mind the new 9 month one. The period will remain 36 months for individuals who are disabled or resident in a care home. PRR lettings relief provides CGT relief to an individual, up to a cap of £40,000, if the property was occupied at some point as the owner's main residence and a gain was made during a period in which the property was occupied by a tenant. In the Autumn Budget 2018, it was announced that lettings relief would be restricted so it will only apply where the owner is in shared-occupancy with the tenant with effect from 6 April 2020. The change will affect tenancies that began before 6 April 2020 and means that, where the owner is not living in the property, no lettings relief will be available beyond the period for which the property qualifies for PPR. There are some other changes to PRR also (which are outside the scope of this briefing).
Reverse charge for VAT on certain construction services
Previously announced. This has been postponed to October 2020, but the changes are far reaching and now fast approaching. See below for further information.
Reduction in period for payment of CGT on residential property for UK individuals and trusts to 30 days
In line with the introduction of non-resident CGT (NRCGT), this markedly shortens the filing and tax payment date for gains on UK residential property to 30 days from the date of completion. The current position potentially gives rise to a 21 month delay in that filling and tax payment is not required until 31 January following the end of the relevant tax year of the disposal. This will be a big cash flow disadvantage for many and interest and penalties will arise for non-compliance. Helpfully, there are certain exemptions, such as where the gain is covered by PRR or prior capital losses, but these should be considered on the facts. The new filing and payment date will not apply to UK companies.
