The Treasury has issued a consultation paper introducing proposals for new tax charges to be introduced for UK commercial property held through international ownership structures. The proposals could have a significant financial impact on investment decisions, and could conceivably put a brake on property development across the UK.
Historically, UK commercial property has been an attractive asset for foreign investment. Office blocks, hotels, and industrial parks across the country have been built with foreign money, and are owned through non-UK structures ranging from the relatively mundane (e.g. non-UK companies) to the exotic (e.g. Jersey Private Unit Trusts). More recently, the government has encouraged foreign investment into commercial property by allowing non-domiciled individuals to bring funds to the UK tax-free for such projects.
Net returns on the disposal of UK commercial property will reduce. The rules will impose a tax charge on the foreign owner when commercial property or the company owning it is sold. They will also extend existing tax charges on the sale of residential property to include companies with multiple shareholders. In addition, proposals include other changes that appear merely technical, but which in practice are likely to increase the amount of tax payable by foreign companies: freezing indexation relief, and taxing rent under corporation tax rather than income tax rules.
There are some good tax arguments in favour of these changes. It never really made sense to tax residential and commercial properties in different ways, and the government’s proposals will rationalise the system. The changes will also put foreign and UK resident investors on the same tax footing, removing imbalances from the property market that currently make investment more expensive for UK investors than for their foreign equivalents. They are also likely to raise a decent amount of additional revenue.
However, there is a cost to all of this. Owners looking to sell will face a choice between reducing margins and increasing prices, and landlords may have no option but to suffer the additional tax cost. Combined with increasing interest rates, there could be a significant destabilising effect on the commercial property market, at a time when businesses are desperate for stability.
The new legislation will not take effect until April 2019, and includes some protections for existing structures, but there is no doubt that many investors will need to review their plans; and investment funds previously earmarked for the UK may find their way elsewhere.
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