After a series of fairly fundamental changes to the taxation of real estate, this Budget was relatively quiet in terms of new property specific announcements but more general changes could have a significant impact for those in the industry.
Over recent years, we have seen a continuing theme of ‘levelling the playing field’ in real estate between the tax treatment of UK residents and non-UK residents, between gains on residential and non-residential property and with non-UK resident company landlords brought within the charge to corporation tax rather than income tax to align their treatment with UK companies holding property. Much of this was announced in the Autumn Budget 2017. It is interesting now to see the Government tip the scales in favour of UK residents by proposing a 1% Stamp Duty Land Tax (SDLT) surcharge on non-UK residents acquiring residential property in England and Northern Ireland.
Announced at the Conservative Party Conference, the surcharge was billed as part of Theresa May’s personal mission to fix the ‘broken’ housing market. Alongside planning reforms and funding packages, the Budget included two further tax measures in this area. The first is an extension (and backdating) of first-time buyers’ relief from SDLT in England and Northern Ireland for all qualifying shared ownership property purchasers. The second is a consultation on tightening the private residence relief for Capital Gains Tax (CGT). The proposals, which potentially reduce the amount of the exempt gain on an individual’s only or main home where the property has been let for part of the ownership period, appear to be a further attempt to discourage landlords through increased taxation.
While not specific to real estate, the changes to Entrepreneurs’ Relief are important for property developers and other property trades. In particular, the extension from 12 months to 24 months of the minimum period throughout which the qualifying conditions for relief must be met could increase the tax charge on the disposal of trading companies if the development is completed in less than two years.
For investors, the changes to capital allowances could be significant. On the one hand, the temporary increase in the Annual Investment Allowance to £1m provides a helpful acceleration of tax relief on qualifying capital expenditure; on the other, the reduction in the rate of special rate pool allowances from 8% to 6% defers relief over the longer term. It was also announced that the availability of environmental enhanced capital allowances will be withdrawn. Another potentially costly change is the extension of the corporation tax loss restriction to capital losses. Those corporate investors expecting to offset property gains over £5m with brought forward capital losses could find their ability to do so is limited. In addition, the Budget included confirmation that the payment of CGT on residential property will be accelerated for individual investors.
One surprise announcement was the new structures and buildings allowance, which aims to stimulate investment in structures and buildings that are intended for commercial activity. Tax relief will be available at 2% per year over 50 years for the costs of physically constructing new structures and buildings that are used, broadly, for a trade, profession or qualifying business (including a property business). This is a welcome change to reduce the overall cost of capital expenditure that has not attracted relief since the phasing out of Industrial Building Allowances.
Increases to personal allowance and higher rate threshold
The personal allowance and higher rate threshold will increase from 6 April 2019, bringing them to the levels promised in the 2015 Conservative manifesto.
The Government has brought forward its commitment to raise the income tax personal allowance and the 40% income tax threshold from 2020/21 to 2019/20. Consequently, the personal allowance for 2019/20 will increase to £12,500 (up from £11,850 in the current tax year) and the basic rate limit will rise from £34,000 to £37,500.
These thresholds will remain at the same levels for 2020/21. For future years, the personal allowance and higher rate threshold will increase in line with consumer price index (CPI).
"The early introduction of these increases will be welcomed by many taxpayers.
The Government’s analysis states that the changes will result in 32 million individuals’ tax bills being reduced in 2019/20 compared to 2015/16, and that the effect of the increase to the personal allowance will result in a typical basic rate taxpayer paying £1,205 less tax in 2018/19 than in 2010/11.
Not all taxpayers, however, will benefit from the increase to the personal allowance. Those on low incomes will not fully benefit from the increase, where their income is less than the personal allowance, or where the increase in after tax pay results in a reduction in their means tested benefits.
In addition, those with incomes above £100,000 will continue to see their personal allowances restricted for every £2 of income above this threshold. As the £100,000 limit has not changed despite increases in inflation, it is likely more people will fall into this category."
When will it apply?
This measure will apply from 6 April 2019.
Proposed rent-a-room relief restriction withdrawn
Following a consultation on draft legislation, the Government has decided not to proceed with plans to include a shared occupancy test for rent-a-room relief.
Rent-a-room relief provides an income tax exemption for rents received by individuals who rent a room (or rooms) for residential purposes in their only or main residence. The exemption is currently £7,500.
The Government had previously announced that from 6 April 2019, it would introduce an additional ‘shared occupancy’ test for obtaining rent-a-room relief. The test would have required individuals to occupy the property at the same time as the tenant for at least some of the letting period.
The Government has decided that it will not go ahead with the introduction of this additional test in order to "maintain the simplicity of the system”.
"The shared occupancy test was largely intended to prevent those letting their homes through Airbnb and other similar sites from benefiting from rent-a-room relief when the let was of the entire property.
The withdrawal of the legislation, however, may not be the positive news it initially appears. HMRC has always taken the view that letting the whole of the property disqualifies that individual from claiming rent-a-room relief. There is nothing to suggest that this view has changed. In fact, it is stated in the Budget that the Government will “ensure the rules around the relief are clearly understood”.
This may therefore be the case of the Government deciding that the existing legislation is sufficiently robust to target rent-a-room relief at the intended users. Those letting their property through Airbnb still need to carefully consider whether or they are eligible for rent-a-room relief."
Voluntarily submitted tax returns to be given a statutory basis
HMRC's practice has always been to treat voluntary tax returns as if submitted in response to a statutory notice to file. Although saving additional administration work all round, the status of enquiry notices in such cases has been questioned, so legislating for the practice will give certainty for taxpayers and HMRC.
When a taxpayer submits a tax return without having been issued with a statutory notice to file, HMRC will nonetheless accept the return and process it as a ‘voluntary’ tax return. This effectively treats such returns as if submitted in response to a return notice.
HMRC has considered it has been able to do this under its discretionary collection and management powers.
There have been some recent legal challenges to this practice so legislation will be introduced, with retrospective effect, to put the practice onto a statutory basis. The intention is to remove any doubt for taxpayers that ‘voluntary’ tax returns have and will continue to be accepted as valid returns.
This will include returns submitted by individuals, partnerships, trusts and companies.
"The self assessment regime requires a taxpayer to submit a tax return in response to a notice to file or to notify HMRC of a liability to tax. The latter generally leads to HMRC issuing a notice to file a return.
There are some occasions where the tax liability is notified to HMRC by the submission of an unsolicited return form. Processing these as if in response to a notice to file a return saves time where the self assessment is accepted.
Problems have arisen when HMRC wants to enquire into such returns. This change will help clarify the position and avoid disputes over the validity of enquiry notices and related closure notices."
When will it apply?
It will apply retrospectively from the date Finance Bill 2018-19 receives Royal Assent to tax years 1996-97 onwards.
VAT and indirect taxes
Stamp duty land tax surcharge for non-UK residents
A consultation will be launched in January 2019 on the potential implementation of a 1% stamp duty land tax (SDLT) surcharge for non-UK residents buying residential property in England and Northern Ireland.
UK resident and non-UK resident taxpayers currently pay the same rates of SDLT on purchases of residential property in England and Northern Ireland. The Government is proposing to introduce a 1% surcharge to increase the amount that would be payable by non-UK residents.
Any change will not automatically apply in Scotland or Wales. Responsibility for such taxes has been devolved to their respective governments, who have subsequently introduced a separate land and buildings transactions tax (Scotland) and a land transactions tax (Wales).
Little detail is currently available about how the proposal would work in practice. It will presumably be levied in addition to existing SDLT rates and surcharges, such as the existing 3% surcharge for purchasing a second residence. This would mean that a non-resident taxpayer purchasing a £1m property could in some circumstances pay almost twice as much SDLT as a UK-resident replacing a main residence. If the Government moves forward with this measure, it will be interesting to see if the change is replicated by the Welsh and Scottish governments, as they did following the introduction of the 3% surcharge for the purchase of additional residences.
When will it apply?
These measures are subject to consultation with no fixed date for implementation.
Changes to capital allowances and a significant boost of the Annual Investment Allowance limit
A number of changes to capital allowances have been announced, the most significant being the temporary increase in the Annual Investment Allowance (AIA) to £1m. A new Structure and Buildings Allowance will be introduced, as well as a reduction in the allowance rate for the special rate pool.
The AIA will be increased from £200,000 to £1m for two years from 1 January 2019 to stimulate business investment.
In addition, a new allowance, the Structures and Buildings Allowance (SBA), was announced, which essentially provides for a 2% capital allowance on the cost of any new non-residential structures and buildings. The allowance will apply where all the contracts for the physical construction works are entered into on or after 29 October 2018.
The special rate of writing down allowances for qualifying plant and machinery will reduce from 8% to 6% from April 2019.
The Government will also update the Energy Technology List and the Water Technology List for the qualifying criteria to qualify for First Year Allowances.
"The Government is keen to stimulate capital investment and improve the international competitiveness of the UK's tax system. These changes will provide significantly faster tax relief for qualifying investment and is a welcome change for businesses."
When will it apply?
The AIA will increase from 1 January 2019. The SBA will apply from Budget Day for appropriate contracts. The special rate of writing down allowances for plant and machinery will apply from April 2019.
Amendments proposed to the Diverted Profits Tax rules
Rules will be introduced in Finance Bill 2018-19 to close tax planning opportunities and make clarifications and modifications to the mechanics of the Diverted Profits Tax (DPT) legislation.
DPT was introduced to counter specific arrangements designed to erode the UK tax base, either by seeking to artificially avoid creating a UK permanent establishment that would bring a foreign company into the charge to UK corporation tax, or by using arrangements or entities which lack economic substance to artificially divert profits to low tax jurisdictions.
The Government is proposing to:
- Close a tax planning opportunity whereby tax returns can be amended after the review period has ended and the DPT time limits have expired;
- Make clear that diverted profits will only be taxed under either the DPT or corporation tax rules, but not both; and
- Extend the review period during which HMRC and the company should work together to determine the extent of diverted profits and increase the period of time during which companies can amend their corporation tax returns for diverted profits.
"These amendments have been introduced to clarify the DPT provisions as part of HMRC’s mandate to tackle erosion of the UK tax base. The announcements do not come as particular surprise, especially given HMRC's recent interest in this area."
When will it apply?
These measures will have effect on and after 29 October 2018.
Restriction to availability of Entrepreneurs' Relief through a change to minimum qualifying period
The minimum period throughout which certain qualifying conditions must be met for an individual to be able to claim Entrepreneurs' Relief (ER) is to be extended from 12 to 24 months. Measures will be included to protect entrepreneurs whose businesses have already ceased by preserving the one year qualifying period for such businesses where cessation was before 29 October 2018.
ER is only available on the disposal of shares in a company where the company is the entrepreneur’s personal company. The personal company conditions previously had to be met for a period of 12 months prior to the sale of the business. A business also currently has to be owned for at least 12 months before sale. These qualifying periods will now be extended to 24 months.
ER can also be claimed where a business has ceased to trade, provided that the qualifying conditions were met during the period prior to cessation and that the disposal takes place within 3 years of the company ceasing to trade. A specific protection will be included to apply the 12-month holding to businesses that ceased (or personal companies that ceased trading) prior to 29 October 2018, to avoid retrospectively penalising entrepreneurs who are in the process of winding up a company.
"This is a further tightening of the ER rules, which will limit the availability of the relief for some entrepreneurs.
Although the protection for those whose businesses have already ceased is welcome, this does not extend to those currently negotiating the sale of their business. Where such businesses have new shareholders, it will be necessary to complete these transactions before 6 April 2019 to ensure those shareholders don't lose entitlement to this valuable relief.
We would recommend that all entrepreneurs review their position to consider the availability of ER in the event of a short-term sale and whether or not any planning steps need to be taken now in anticipation of a sale in the medium to long-term."
When will it apply?
This change will apply to disposals made on or after 6 April 2019.
Payments on account of capital gains tax following residential property disposals
Finance Bill 2018-19 will introduce a requirement for UK resident taxpayers to make a payment on account of capital gains tax (CGT) following a residential property disposal. New legislation will also replace the existing rules for reporting and payment of tax that apply to non-UK resident taxpayers. Budget 2018 has announced some tweaks to draft legislation published in July 2018.
Currently, CGT is typically due for payment by the 31 January following the end of the tax year in which a chargeable capital gain is realised. Non-residents, however, must report disposals of UK residential property via a non-resident CGT return and in many cases pay any tax due within 30 days of completion.
Under the new legislation, the draft proposals for which were published in July 2018, all taxpayers who are subject to CGT must file a tax return and make a payment on account of the tax within 30 days of completion. The payment on account will be self-assessed and will take into consideration unused losses and the person’s annual exempt amount.
UK residents will not need to file a return or make a payment if:
- the gain on the disposal is not chargeable to CGT; or
- it arises from the disposal of a foreign residential property in a country covered by a CGT double taxation agreement; or
- it is foreign property and the gain arises to a person taxed on the remittance basis.
Following further consultation, Budget 2018 has announced the following changes to the legislation:
- a reasonable estimate of valuations will be allowed where these are not available before the reporting deadline;
- sales of non-UK properties by UK residents will be exempt from the rules; and
- non-UK resident companies will be exempt from the reporting requirement.
"It is hoped that HMRC fully publicise the new rules so that taxpayers are sufficiently aware of their reporting requirements.
Allowing the use of a reasonable estimate of a valuation appears to be a sensible amendment to the existing draft legislation. Taxpayers may have otherwise experienced difficulties in complying with the required 30 day deadline to report their capital gains.
It is assumed that non-UK resident companies will be exempt from the reporting requirements because gains made by non-UK resident companies will be subject to corporation tax from 6 April 2019."
When will it apply?
These changes will broadly apply from 6 April 2019 for non-UK residents (with a minor change applying from 6 April 2020) and from 6 April 2020 for UK residents.
Consultation announced to reform specific elements of the private residence relief rules
Changes are expected to reduce the final period exemption from the current 18 months to 9 months and to restrict the availability of lettings relief.
A consultation has been announced into private residence relief (PRR) for CGT. The consultation is limited to the final period exemption and lettings relief.
PRR reduces the chargeable gain that accrues on an individual’s only or main home. The relief applies during the period of ownership that the property was the main residence plus a final period exemption, even if the property is not the main residence for the owner at that time. This final period is currently 18 months but is expected to be restricted to 9 months. A longer period of 36 months exists for disabled persons and those in care homes, and this is not expected to change.
Lettings relief provides a further relief to cover a period of letting at the lowest of the following:
- the PRR available;
- the gain accruing during the let period; and
As such, lettings relief is only ever available on the let of a former home and the maximum tax relief is £11,200 at current CGT rates. The relief is expected to be restricted so that it only applies where the owner of the property is in ‘shared-occupancy’ with a tenant.
Both of these changes reflect the Government’s discouragement of landlords through taxation as a means of opening up the UK housing market. These new proposed changes to the CGT relief demonstrate this further by discouraging homeowners from retaining a property as they move up the housing ladder.
The final period was 36 months prior to April 2014, which shows a real reduction in the relief over this relatively short period. While this clearly fits in with the prevailing attitude to landlords, the timing is perhaps somewhat surprising given the slowdown in the UK housing market. Many homeowners are not retaining their properties deliberately but rather because they are unable to find a buyer. It will be interesting to see if the UK housing market's performance over the next couple of years influences the final decision on the grace period at all or if, in fact, the proposals impact the housing market directly with sellers reducing prices to ensure a sale prior to the change.
Arguably, lettings relief has always been somewhat generous given no equivalent exists for pure buy-to-let properties. The intention of the relief was, however, to encourage home-owners to make use of the property through letting if they were unable to sell immediately. Again, given the current housing market, we may see more vacant housing stock. Homeowners will not want to enter into a 12 month rental agreement knowing that after 9 months they risk exposure to CGT. They will instead simply keep the empty property on the market.
The statement around ‘shared-occupancy’ would appear to be somewhat unnecessary as someone with a lodger in their home should not suffer a restriction to their PRR, making the availability of lettings relief superfluous in these circumstances. We await the consultation document to ascertain the specifics of the proposed reform for some clarity as to why this statement was thought necessary.
When will it apply?
Following a period of consultation, the change will apply for disposals after April 2020.
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.
This article was previously published on Smith & Williamson prior to the launch of Evelyn Partners.