Significant changes to the UK tax treatment of property have been introduced. These will impact both residents and non-residents who are involved in the development or sale of UK land and many offshore property holding structures.
The new tax rules
There are three circumstances in which the rules can apply:
- Where you sell UK land, and one of your main purposes was to make a profit from selling the land. This "main purpose" can be present when the land was acquired, when shares in a company (or other entity) holding the land were acquired, or when any development of the land took place.
- Where you sell UK land held as the trading stock for a trade you carry out. Unlike the previous position, HMRC does not consider it needs to establish that this trade is connected with a "permanent establishment" you have in the UK.
- If you sell any assets (such as shares) which derive at least half their value from UK land (through any number of companies, trusts, or partnerships), then the rules apply where you are party to an arrangement to deal in or develop the land and make a profit from selling any property deriving any part of its value from the land.
These rules apply on a company-by-company basis, so can impose tax on disposals within a group. They can also consolidate activities carried out by others on behalf of the entity selling the land or asset, and can apply to an entity other than the one selling the land if commercially that entity realises the profit (e.g. through a profit participation arrangement or a management or development agreement).
Broad anti-avoidance and "anti-forestalling" rules apply where measures are (or have been) put into place to avoid the rules, which apply retrospectively since Budget Day on the 16 March 2016.
The rules are not yet in force, but they will have retrospective effect from 5 July 2016. The anti-avoidance provisions will have effect from Budget Day (which was the 16th of March). There is no grandfathering — any disposal on or after 5 July could be caught.
We do not expect any material changes to the rules to be made before the Bill receives Royal assent. The provisions as currently drafted should be treated as if they were law.
Impact on you
These rules should be considered whenever sellers, purchasers, or borrowers intend or expect to be outside the UK tax net in relation to any development or sale of UK land. The new rules can increase UK tax exposure from 0% to 20% of profits.
The rules will impact much ongoing real estate finance and indirect real estate structuring work. It will also have a significant impact on historic offshore holding structures, and should be borne in mind where historic structures, such as offshore property funds or companies (and the associated tax liabilities) may be inherited.
Care should be taken when drafting construction contracts, development agreements, fund documentation, and joint venture or shareholders' agreements to ensure that the impact of the rules is minimised.
A comparison of the old and new tax rules
Non-residents disposing of UK land were treated significantly differently to UK tax residents. A number of options were available to the former to argue that their profits were not within the scope of UK tax, including arguing that they did not have "permanent establishment" in the UK or that the profits were properly foreign-sourced income of a foreign company. The table below outlines the changes that these rules bring, which depend on the asset class sold, whether the asset sold is part of a trade of the vendor or is an investment, and whether the vendor is UK tax resident. Anti-avoidance rules, in particular the "Diverted Profits Tax" (currently at 25%), can apply to override the treatment set out in this table.
What we can do
Addleshaw Goddard has the technical expertise, commercial focus, and real estate sector know-how and experience to assist you with these rules. We would be happy to help you assess the impact that these rules could have on your business. We can work with you to revisit old structures which may no longer be delivering the tax savings you expect and help restructure these in a tax-efficient manner. We can ensure that robust protections are in place in transactional documentation and, where relevant, help preserve evidence of your intentions to ensure future purchasers and HMRC are comfortable with the tax position you have taken.