Amid the current political storm, the government quietly continues with tax reform, including a wholesale change of the taxation of corporate overseas landlords.
At a time of unprecedented political instability and economic uncertainty, these changes could have wide-ranging effects on an increasingly anxious overseas investment market.
The consultation – what is it and what did we say?
In December 2016, the government announced a consultation on bringing overseas corporate landlords within the charge of UK Corporation Tax (See: “Reform of Non-Resident Landlord Scheme” 12 December 2016). Non-Resident Landlord companies (NRLs) are subject to Income Tax on rental income from UK property, at a rate of 20%. Unlike Corporation Tax, there is no scheduled rate reduction in April 2017 or at a later stage.
Published in March 2017, the consultation - Non-resident companies chargeable to income tax and non-resident capital gains tax is seeking comments from industry, advisers and public bodies to explore the case for bringing NRLs within the corporation tax regime. The consultation closed on 9 June and HMRC is now considering all responses.
We are actively involved in the consultation, delivering the following key messages:
- Keep things clear
Real estate investment businesses follow relatively simple business models. The income tax system for overseas investors has mirrored this simplicity and is reasonably well understood. We welcome any alignment of tax regimes where it aids longer-term decision-making and eases the compliance burden. That said, any changes that increase complexity are likely to stymie investment volumes in the UK commercial property market and the funding of Private Rented Sector schemes.
- Uncertainty breeds investor unease
Tax certainty is a critical decision making factor for investors. In recent years, overseas investors have seen a number of significant changes to taxation and the proposals bring yet another major change.
Having pushed back the Finance Bill for the snap election, investors continue to find it impossible to calculate the impact of major changes to interest deductibility and losses. We have seen significant numbers of overseas investors putting their UK investment plans on hold – and looking elsewhere for a safe and stable investment environment.
- Impacts need consideration
We recommend an impact assessment of any measure to change the taxation of UK property ahead of implementation. Overseas capital brings significant economic benefits to the UK and the impact on business must be considered, as any changes could impact investor sentiment and have unintended consequences.
What is the government’s response?
HMRC have acknowledged our consultation response and appear to understand the complexities of the proposed changes.
HMRC have indicated that they will consider the impact of the proposals in due course. We urge that an impact assessment be carried out now, ahead of deciding any significant changes. While uncertainty remains, the detrimental impact has begun and we must act now to reassure overseas investors that the UK is still open for business.
There is no further information on the timing of the proposed introduction; it is unclear whether this will be 6 April 2018 or if we are looking at 2019 or beyond.
Our view is that any proposal to bring in such complex changes within a year severely underestimates the amount of work required for implementation. We believe this should involve carrying out an impact assessment (engaging with worldwide investors, potentially in many languages), crafting simple and clear legislation, and educating overseas investors on new systems and allowing them and their advisors time to implement changes.
We continue to input into discussions with the industry and government. Investors need immediate assurance that an impact assessment is at the top of government’s agenda.
What are the consequences for overseas investors?
However changes are implemented, it is clear that the government aims to align the tax treatment of overseas and UK investors. We are reasonably confident that tax rates will be aligned and if the proposed cuts continue, tax rates will fall for non-resident landlords to 17% by 2020.
The introduction of interest restrictions and restriction of losses heralded by the OECD’s Base Erosion and Profit Shifting (BEPS) programme are here to stay, and based on the government’s current agenda, it seems inevitable that these rules will be brought in for overseas investors in some form.
For the time being, investors must continue to make prudent assumptions on any potential acquisitions regarding deductions available for the cost of finance and the availability of losses. Investors will also need to assess the potential financial impact of these changes to any existing property businesses.
Speak to us and find out how we can help you manage the complexity and assess the potential impact of these changes, to put your business on the front foot for navigating the future tax landscape.
If you are interested in discussing this further with us, please contact Sarah Gatehouse.