UK: UK Autumn Budget - Taxation Without Representation

Last Updated: 4 December 2017
Article by Vince Cheshire

The media headlines focused on gloomy growth predictions and reductions in stamp duty for individuals buying residential property for the first time, but there were some measures announced in the UK's Autumn Budget that may impact businesses, particularly those investing from overseas.

The UK finance minister (Chancellor of the Exchequer), Philip Hammond presented his second budget to Parliament on Wednesday 22 November 2017. The media headlines were full of gloomy growth predictions, and reductions in stamp duty for individuals buying residential property for the first time. But there were some measures announced that may impact businesses with operations or assets in the UK, particularly those investing from overseas.1 These are highlighted in this article.

Of course, no action should be taken based on the contents of this article without seeking specific tax advice.

Tax on sales of all UK real estate by non-residents

From April 2019, the sale of all UK real estate will be subject to UK corporation tax (for corporate owners) or capital gains tax (for individuals and trusts) on any capital gain realised, regardless of where the owner is resident. Previously, UK tax had only been levied on sales of residential real estate for non-residents, but this is now extended to commercial property. The gain on commercial properties for non-residents will be calculated based on the increase in value since April 2019 if held then or, by election, on the increase in value since purchase, if acquisition cost is higher.

The government is also proposing to extend this tax charge to 'indirect' sales of property, where a company that is UK property-rich (defined as having more than 75% of its assets by value in UK real estate) is sold to another individual or entity. It is proposed the tax is levied on any individual or entity selling more than 25% of the UK property rich company's shares.  There will be limited exemptions for Real Estate Investment Trusts.

Companies will be required to report the tax charge within 30 days of sale (and possibly to pay the tax by that deadline), unless they are within the UK self-assessment tax regime. An obligation on UK professional advisors to report if they suspect a client has failed to declare their gain is also proposed.

Future tax rate reduction for non-resident companies on UK property income

The government is also proposing that, from April 2020, non-resident companies owning UK real estate will pay UK tax on their UK property income at corporation tax rates (currently 19%  but expected to fall to 17% from 1 April 2020) rather than at the basic rate of income tax (currently 20%).

Increase in ATED rates

Companies owning UK residential property pay an annual tax on enveloped dwellings (ATED). The ATED charges are increasing from 1 April 2018 by 3%, so the annual charges become £3,600 for properties valued between £0.5m and £1m, £7,250 for properties valued between £1 and £2m, £24,250 for properties valued between £2m and £5m, £56,550 for properties valued between £5m and £10m, £113,400 for properties valued between £10m and £20m and £226,950 for properties valued at over £20m.

Loss of capital gains tax indexation relief

Currently, UK companies only pay corporation tax on capital gains on the sales of assets to the extent that the gains exceed inflation. This is achieved by the companies receiving an indexation allowance based on cost. This indexation allowance will be frozen from 31 December 2017, so any inflationary increase in value thereafter will not be tax deductible. This brings the calculation of capital gains in companies into line with those for individuals, but does not significantly reduce any benefits of holding assets in companies.

Joint liability to VAT

Online marketplaces such as eBay will in future be liable for Value Added Tax (VAT) if a vendor using their site fails to pay any VAT due on the sale of an asset. There are also proposals on the displaying of VAT registration numbers on such websites.  These measure will take effect when the Finance Bill receives Royal Assent. (Formal approval by the Queen for the bill to become law. A brief explanation of the approval process is provided at the end of this article).

Use of consultants

In the last Finance Act, the government required public sector (government) entities to apply income tax and national insurance (social security) contributions to payments to consultants' companies, where the consultants are effectively acting as employees of the entity. As part of his Budget presentation, the Chancellor announced a consultation on extending this requirement to all businesses.

Funding HMRC

The Chancellor also announced an additional £155m of funding for HM Revenue & Customs (HMRC), the UK's tax authority, to help it focus on tackling marketed tax avoidance and non-compliance.

The changes announced in the Autumn Budget generally place an additional tax burden on companies and overseas investors in particular.  Strangely enough, companies and overseas investors do not have votes. Perhaps this is not a coincidence?

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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