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Autumn Budget 2017

Autumn Budget 2017: Kersten Muller - capital gains tax

Kersten Muller, Partner, Property Tax, Grant Thornton UK LLP, comments on capital gains tax proposals:

“So, everyone is pouring over the detail of Budget 2017. Housing undoubtedly took centre stage and we already provided commentary on that here

“However, there were some other material changes tucked away in the detail:

  • Overseas investors in commercial property will be subject to UK tax on gains accrued from April 2019. Corporates (including non-residents) will be subject to corporation tax; other persons will be subject to capital gains tax (CGT), and
  • Those investors, corporate Non-Resident Landlords (NRL), will be subject to UK Corporation tax from April 2020, rather than income tax.

“The government started consulting on potential changes to the taxation of property income received by overseas investors with a stated aim to align the taxation of property income with that of UK companies, in particular in relation to the deductibility of interest. Bringing gains on commercial property within the scope of UK tax was not one of the aims.

“It is particularly surprising that the announcement came before there has been a response to the industry’s (including our own) feedback on the proposed changes to the NRL Scheme, and then one so unexpected.

“From April 2019, overseas investors will start paying tax on capital gains on all UK property (subject to specific exemptions for institutional investors). Coinciding with Brexit we do question whether this gives the right signal to overseas investors that the UK is “open for business”.

“Whilst the rationale for raising tax from overseas investors is possibly understandable, we need to bear in mind that overseas investment in commercial property does support large employment in the UK and brings wider economic benefits. In fact, a number of the overseas funds investing into UK commercial property are the “patient capital” the chancellor referred to in his speech. Increasing the cost of investing in property at a time when GDP growth is forecast to be relatively low could have a significant impact on the wider economy.

“Looking at the policy costings does highlight some big inconsistencies:

  • The extension of tax on gains is expected to raise £300m over 5 years
  • The SDLT relief for 1st time buyers will cost £3bn over 5 years, and
  • The removal of the indexation allowance for UK companies will raise another £1.77bn over the same period.

“So, for a relatively low tax-take there will undoubtedly be lots of new and complex legislation.

“Interestingly, UK pension funds and UK REITs should continue to be exempt from tax on gains on commercial property. The question is whether there will be a big shift in investor base.”