Budget 2018 – Key highlights for international clients
In the last UK budget before Brexit there were, thankfully, very few new proposals that will affect international clients investing into the UK.
We have pulled out a few of the key highlights for our international clients and their advisors, along with a recap of some of the major changes coming up in 2019 and 2020. We focus on the changes for international corporate landlords who hold UK property, and the extension of UK Capital Gains Tax to UK commercial property and indirectly held UK property.
A consultation on the proposed increase in the Stamp Duty Land Tax of 1% for foreign purchasers will also be one to watch in the new year.
- January 2019: Consultation on an SDLT surcharge of 1% for non-residents buying residential property in England and Northern Ireland.
- April 2019: Extension of UK Capital Gains Tax to UK commercial property.
- April 2019: Extension of UK Capital Gains Tax to indirect disposals of UK property.
- April 2019: Non-UK Companies making a direct or indirect disposal will become subject to UK Corporation Tax.
- April 2020: Non-UK Companies who receive rental income from commercial or residential property will become subject to UK Corporation Tax.
On 29th October 2018, Phillip Hammond delivered the last UK budget before the UK is due to leave the EU. This was delivered with the promise of the end of austerity, on the proviso that a ‘good deal’ can be struck for Brexit. If the UK instead comes crashing out of the EU with no deal, or a bad deal, we may see another emergency budget and possibly a further squeeze on international investment into the UK.
For now, the only new announcement in the budget affecting international investment is the proposal to introduce a 1% surcharge for non-UK residents buying residential property in England and Northern Ireland. The consultation is due to be released in January 2019.
Summary of Budget 2018
- Corporation tax is still due to fall to 17% from April 2020.
- The income tax personal allowance will be raised to £12,500 and the higher rate threshold to £50,000 from April 2019, one year earlier than planned.
- The UK Capital Gains Tax annual allowance increases to £12,000 for individuals and £6,000 for trustees from April 2019.
- A Digital Services Tax is proposed from April 2020. A 2% tax is proposed on the revenues of certain large digital service providers (search engines, social media platforms, online marketplaces) to reflect the value derived from UK users.
- A consultation on the taxation of trusts is still proposed.
- The final period exemption for Private Residence Relief from UK Capital Gains Tax is to be reduced to 9 months from April 2020, along with restrictions to lettings relief.
- A consultation on the proposed 1% surcharge was announced, for non-UK residents buying residential property in England and Northern Ireland.
A recap on the upcoming changes to UK property taxation in 2019 and 2020
The UK taxation of investment into UK property has changed dramatically over the past decade.
For property purchasers it can be difficult to know how to purchase the property; as an individual, through a trust, through a company? In some cases, ownership through a company can still be the most tax efficient vehicle.
Those who are selling property need to know what to pay, and when, to avoid UK tax penalties. Have they considered all the options? Should they sell the property company rather than the property itself?
And for those who are landlords receiving income, what are the rates, how do they pay and is their structure suitable for the new UK tax landscape?
We explore a few of these points below but for a comparison of four of the main ways to hold UK commercial property and UK buy-to-let property please see our useful guides:
The restriction on the relief for interest costs continues to be phased in for individual landlords. This does not affect corporate landlords. In April 2019-2020 25% of finance costs will be allowable as a deduction; 75% will be given as a basic rate tax deduction. From April 2020, all financing costs incurred by a landlord will be given as a basic rate tax deduction.
UK Capital Gains Tax will be extended to non-UK owners of UK commercial property from April 2019. This is only for gains that would be treated as chargeable gains, not those that would be treated as trading income. This will be charged on any gain made after April 2019. Non-UK companies who dispose of UK property from April 2019 (commercial or residential) will be subject to UK corporation tax rather than Non-Resident Capital Gains Tax. ATED related Capital Gains Tax will be abolished.
UK Capital Gains Tax will be extended to indirect disposals of UK property from April 2019. Where 75% or more of the assets of a company relate to UK property, this will be a property rich company. If the shares in that company are sold, any shareholders (along with connected persons) who own 25% or more of the shares in that property rich company will be taxed on any gain made on those shares after April 2019.
Corporate Non-Resident Landlords will be subject to UK Corporation Tax on rental receipts from April 2020. Currently, non-UK corporate owners of UK property are taxed as Non-Resident Landlords on any rental receipts from UK residential and commercial property. Tax is assessed under the income tax rules. From April 2020, they will be taxed under the UK corporation tax rules and will need to file UK corporation tax returns.
Some of the key changes will be:
- The tax rate will fall from the current 20% basic rate band for non-resident landlords, to the proposed 17% corporation tax rate.
- They will need to be registered for UK corporation tax and file UK corporation tax returns rather than non-resident landlord returns. The notification, filing and payment dates will be different from the non-resident landlord rules.
- Financing costs will fall under the loan relationship and derivative contract regime, which may limit the deductibility of finance costs for landlords.
- Corporate landlords will become subject to the new UK rules for restricting finance costs and net interest.
- Old losses and new losses will need to be kept separate and will be used in different ways.
The Residence Nil Rate Band for UK Inheritance Tax will rise to £150,000 from April 2019. From April 2020 this will be £175,000, giving a total nil rate band of £500,000 per person, or £1 million per couple. The relief is withdrawn for estates with a net value above £2 million, with a withdrawal rate of £1 for every £2 over this threshold. This relief applies where a residence has been used as the deceased’s residence at some point and passes to a direct descendent on death.