The UK Budget and Non-Resident Corporate Landlords
The UK Budget – what it means to you
On the 11 March 2020, the Chancellor of the Exchequer (the United Kingdom’s finance minister) delivered his maiden budget to the UK Parliament.
The backdrop to the Chancellor’s budget speech was an unenviable one: the Chancellor not only had to contend with the precarious economic position of the UK (economic growth has been anaemic in recent years) but also the effects of the Coronavirus, which is expected to have a further negative impact on UK (and World) economic growth.
To counter the adverse backdrop, the Chancellor announced a series of tax and spending measures which sought to provide the economy with a net fiscal stimulus. Alas, a significant proportion of the spending is to be financed by tax increases on the corporate sector, including non-resident landlords looking to acquire UK residential properties.
Further changes to the UK tax landscape for non-resident landlords holding UK land
- Non-resident corporate landlords are to face additional changes to the UK tax landscape over and above the various changes which have occurred during the last 7 years.
- Further to a 2019 public consultation initiated by Government, the Chancellor of the Exchequer has confirmed that a 2% Stamp Duty Land Tax surcharge is to take effect as from 1 April 2021. Based on the consultation, the surcharge is applicable to both non-resident corporate landlords as well as non-resident individuals.
- Non-resident corporate landlords buying UK residential property purchased for more than £500,000 are currently subject to Stamp Duty Land tax at 15%. Under the new proposals, non-resident corporate landlords buying residential properties will face a Stamp Duty Land Tax charge of 17% as from 1 April 2021. Non-resident individuals will face Stamp Duty Land Tax at the usual rates plus 2%.
- The delay in the implementation of the tax rise is by design: it is to encourage non-resident persons to invest in UK residential properties during what is likely to be a period of sluggishness in the top end of the residential property market – in summary, non-resident corporate landlords looking to buy residential properties are being encouraged to do so as soon as possible by the Chancellor of the Exchequer.
Annual tax on Enveloped Dwelling ("ATED")
- Under the ATED regime, introduced in 2013, companies which own residential properties with a value in excess of £500,000 face annual tax charges.
- Pursuant to the budget, the ATED charges – which differ dependent on valuation bandings - will rise by 1.7% as from 1 April 2020.
Mainstream corporation tax measures
- The budget also saw the introduction of a range of “mainstream” tax proposals. Given that non-resident corporate landlords will be subject to corporation tax as opposed to income tax as from 6 April 2020, some of these measures will have direct applicability.
Reversal of a planned corporation tax rate cut
- The largest Budget revenue raiser by far (anticipated to be £4.6bn in FY 2020-21) was the reversal of a legislated-for corporation tax rate cut which was to take effect as from 1 April 2020.
- The corporation tax rate was due to fall to 17% from its current rate of 19% but the current rate is to be maintained for the financial years beginning 1 April 2020 and 1 April 2021.
- Those companies which have paid corporation tax by way of quarterly instalment payments may need to “top up” the amount of corporation tax paid, assuming instalment tax has been paid on the anticipated basis of the 17% corporation tax rate. Unfortunately, expect HMRC to impose late payment of tax interest in this respect, unless they issue a subsequent dispensation.
Corporate capital loss restriction
- Following on from the restrictions on the quantum of brought forward trading losses that could be set against taxable trading income legislated recently, the same principle will now apply to capital losses: the finance bill will legislate to restrict companies’ use of carry forward capital losses to 50% of capital gains as from 1 April 2020.
- This measure - which will save the government £750 million over the next five years - includes an allowance that gives corporate groups unrestricted use of up to £5m capital or income losses each year.
- As a result of this proposal, it is important to plan the timing of capital asset disposals in conjunction with your Arnold Hill & Co LLP tax adviser, to maximise the benefit of any tax losses.
Fortunately, it’s not all take from the Chancellor of the Exchequer.
- The Chancellor increased the rate of Structures and Buildings Allowance (part of the UK’s capital allowances / tax depreciation regime) from 2% to 3% as from 1 April 2020 for corporation tax purposes and 6 April 2020 for income tax purposes. This is a valuable allowance to non-resident corporate landlords and the rate’s increase is welcomed.
- The Chancellor of the Exchequer also made a number of minor changes to the corporation tax regime which is to be applicable to non-resident corporate landlords, including the ability of a non-resident corporate landlord to bring into account in its first accounting period net financing costs incurred 7 years prior to the commencement of its UK property business under the UK’s “loan relationship” legislation.
Other significant Budget corporate measures
Digital services tax
- Legislation will be introduced to establish a digital services tax as from 1 April 2020, the rate being 2% on revenues derived from businesses which provides a social media service, search engine or online marketplace to UK users.
- The tax will only apply to certain large groups and the first £25m of revenues will be exempt from the tax.
Value Added Tax (“VAT”)
- VAT measures have been introduced to simplify the VAT treatment of “call off” stock moved from the UK to EU member states or vice versa. The changes permit a supplier in the state of origin to remove call off stock to storage facilities in a member state of the European Union, the destination state, without accounting for VAT on the transaction at the time. VAT will only be accounted for when the goods are called off (i.e. used by the buyer).
- This measure is effective as from the 1 January 2020 and should be considered in greater depth by any company transiting stock from the UK to Europe or vice versa.
There are a host of measures designed specifically to counter the effects of the coronavirus including the Government agreeing to cover the cost of statutory sick pay for small and medium sized businesses for coronavirus-related absences of up to 14 days.
Additionally, to ease the plight of small businesses, the Chancellor has announced a one year business rates tax holiday for companies which operate from premises which have a rateable value below £51,000. Expect more “alleviation” measures as the Coronavirus slows economic growth in the UK economy further.
The corporate tax proposals announced by the Chancellor of the Exchequer are significant for the corporate sector, including the non-resident corporate landlords. We have not yet seen the draft legislation (draft finance bill) at this juncture but I would expect a reasonable degree of complexity. We’ll reach out to you once the finance bill is published.
Arnold Hill & Co LLP
Should you have any queries or questions in respect of the above, please do not hesitate to contact our Tax Partner Reuben Fevrier your main contact at Arnold Hill.
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The information in this article is believed to be factually correct at the time of writing and publication, but is not intended to constitute advice. No liability is accepted for any loss howsoever arising as a result of the contents of this article. Specific advice should be sought before entering into, or refraining from entering into any transaction.