UK Residential Property: Recent Tax Developments

This article was produced by Nabarro LLP, which joined CMS on 1 May 2017.

Summary and Implications

The tax treatment of UK residential real estate has changed recently and there are certain key developments that anyone looking to invest in or develop residential property should be aware of. This briefing summarises some of the most important recent changes.

The tax treatment of residential real estate depends to a large extent on whether owners hold their assets as investments or as trading stock. Whether an asset is investment or trading will depend on various factors. However, as a general rule, the longer the owner intends to hold the asset the more likely it is to be an investment. Conversely if the owner is developing a property to market and sell it, or sells shortly after acquisition, they are likely to be trading.

Tax issues for INVESTORS in residential property

The most significant recent development for investors in residential property is the extension of UK Capital Gains Tax (CGT) to offshore vehicles. Historically UK CGT has not applied to disposals of real estate investments held by offshore entities, and this is a major shift in the UK tax landscape. In brief:

• CGT will be payable on disposals of residential properties after April 2015, by reference to any uplift in value from April 2015.
• The CGT rate will be 20 per cent for offshore companies and unit trusts, and up to 28 per cent for individuals.
• There is an exclusion for “diversely held” companies, eg funds, pension schemes, certain joint venture structures.
• Student accommodation, care homes and hotels are not affected by this new tax.

Tax issues for DEVELOPERS/TRADERS in residential property

The biggest recent change to the treatment of residential property developers and traders is the introduction of Diverted Profits Tax (DPT). Also known as the “Google tax”, this new tax was introduced to combat perceived tax avoidance by multinationals and digital businesses (e.g. Amazon, Starbucks) using offshore structures to limit their UK tax.

DPT also applies to UK property businesses and will affect certain structures commonly used to mitigate UK corporation tax (current rate 20 per cent) on residential developments. These structures typically involve the site being held by a company in the Channel Islands, and a UK-based development manager.

Where DPT applies, profits will be subject to tax at 25 per cent, so existing structures need to be reviewed to ensure that they remain tax-efficient. New projects will also need to be considered in the context of DPT to ensure the most efficient structure is implemented.

Other aspects of the UK tax regime for residential properties remain unchanged. In particular:

• The Stamp Duty Land Tax (SDLT) relief for acquisitions of “multiple dwellings” continues to apply, often reducing from four per cent to one per cent the rate of SDLT payable on residential portfolio acquisitions.
• Similarly VAT recovery on residential development continues to be more restrictive than on commercial development, with careful structuring often required to maximise VAT recovery.
• The restriction on tax relief for finance costs of buy-to-let landlords announced in the July budget will affect only individuals, and not corporate vehicles.

If you wish to discuss any of these issues please get in touch with your usual Nabarro contact.