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Budget 2020: real estate tax changes

Here is a brief summary of the measures in the March 2020 Budget which are relevant to the Real Estate sector.

Non-UK resident companies with UK property income – As previously announced, non-UK resident companies that carry on a UK property business, or have other UK property income, will be charged to Corporation Tax on UK property business profits or income from 6 April 2020 rather than being charged to Income Tax as at present. If such non-UK companies are not registered under the non-resident landlord scheme (to receive rental income without deduction of UK tax) and the tax deducted (at 20%) from the rental income will not meet their tax liability (for example, the company has interest expense on shareholder loans that would be disallowed for corporation tax purposes), there will now be an obligation on such non-UK resident companies to notify HMRC of their liability to corporation tax from 6 April 2020.

 Rate of Structures and Buildings Allowance – An increase to the annual rate of the Structures and Buildings Allowance (SBA) from 2% to 3% will apply from 1 April 2020 for corporation tax purposes and 6 April 2020 for income tax purposes. This increase reduces the time it will take to relieve qualifying expenditure on a non-residential building from 50 years to 33 and one third years. Other changes will ensure that the legislation allows relief for the first day of qualifying use and allow simplified calculations for all qualifying non-residential structures or buildings.

Review of the UK funds regime – the UK government will be consulting on potential changes to the taxation of funds, including real estate funds. The consultation is very wide-ranging and is intended to make the UK a more attractive holding company location for fund vehicles, which could provide a significant boost to the UK fund management industry. The consultation will cover tax matters, including a potential widening of the capital gains tax exemption and the REIT regime, as well as relevant areas of regulation, with a view to considering the case for policy changes. It will also consider the VAT treatment of fund management fees (which are generally subject to VAT in the UK, but exempt from VAT in Luxembourg)

VAT on management fees – the provision of management services to the principal company of a Real Estate Investment Trust will be exempt from VAT from 1 April 2020

 Non-UK resident Stamp Duty Land Tax surcharge – As previously announced, there will be a 2% surcharge for non-UK residents acquiring residential property in England (and Northern Ireland) to take effect from 1 April 2021. There are a number of unanswered questions outstanding from a consultation last year, including whether all non-UK resident companies and non-UK funds (including Jersey unit trusts) will be caught and how you determine whether a person is non-UK resident for SDLT purposes. More information should be provided when the consultation response is published by the government in the next few weeks.

Construction Industry Scheme – Changes will be made to simplify the CIS rules covering deemed contractors (such as property investors with annual expenditure on construction operations in excess of the threshold) and to clarify the rules on allowable deductions for expenditure on materials. New rules will also allow HMRC to reduce or deny the CIS credit claimed on employer returns where the sub-contractor has received payment under a construction contract with tax deducted under the CIS but cannot evidence the deductions. This could lead to sub-contractors requesting certificates of tax deducted in respect of payment from their contractors.

Business rates – The government has already announced that, for one year from 1 April 2020, the business rates retail discount for properties with a rateable value below £51,000 in England will increase from one third to 50% and will be expanded to include cinemas and music venues. To support small businesses in response to COVID-19 the retail discount will be increased to 100% and expanded to include hospitality and leisure businesses for 2021.  Businesses will note that a fundamental review of business rates is now on the government’s agenda which will take place in the spring with a view to reporting this autumn.