There were very limited property specific tax measures introduced in the Autumn Statement. However, wider changes around interest deductibility, losses, the taxation of non-residents and the substantial shareholding exemption will have a major effect on the industry.
As expected the government will limit interest deductions from April next year. The proposals broadly follow the OECD recommendations with a general restriction based on EBITDA, and a group ratio rule.
The British Property Federation and other commentators have pointed out difficulties with the new rules for capital intensive, highly geared industries, such as real estate. For example:
- a recession resulting in voids;
- limited income during development projects; and
- tax to book differences for unrealised capital gains.
A close reading of the draft legislation will be required when it is released on 5 December to see if those concerns have been dealt with adequately.
Again as expected, the government will limit the use of carried forward corporation tax losses to 50% of profits from April 2017. It remains to be seen how these rules will affect development activities where losses build up in a development SPV and all profits are realised in a single period.
Bringing non-residents companies within the scope of UK corporation tax
The government will consult on bringing non-resident companies receiving UK taxable income within the scope of corporation tax. We suspect that this is a mechanism to ensure that interest deductions and the use of losses are treated equally between resident and non-resident companies. But it is likely to have a massive effect on offshore property holding structures.
In particular will capital gains continue to be generally outside the scope of UK tax? Also of concern would be whether interest payments are deemed to be UK source and potentially subject to withholding tax.
One positive measure could be that non-resident companies will be able to access the lower rate of corporation tax when compared with income tax.
Substantial shareholding exemption (“SSE”)
Changes to SSE could benefit the real estate industry. Certain disposals of interests in trading companies are currently tax exempt. The government consulted earlier in the year and will now extend the exemption. In particular an institutional investor exemption could potentially allow for the use of UK, as opposed to offshore, SPVs going forward. Again we expect to know more on 5 December.
Rumours amount to nothing
Finally there were rumours circulating pre-Statement that the 3% additional rate SDLT charge, and interest restrictions for buy to let properties would be abolished. Those rumours proved to be wrong.