Below is a short summary of the key tax announcement that will affect the real estate sector.
Corporation tax rates
The government will stick to its plan to reduce the corporation tax rate to 17% by 2020.
Cap on interest deductions for UK companies
The Chancellor confirmed that with effect from April 2017 (for UK companies), the government will cap interest deductions at 30% of UK EBITDA for groups with more than £2m of net interest expense. A group with £2m or less of interest expense will still be able to deduct that interest in full.
The government will widen the carve-out for public benefit infrastructure projects. We expect to get the detail of this early next month.
UK income of non-UK companies to be subject to corporation tax
Crucially, it seems highly likely that the interest cap will be extended to non-UK companies (although not with effect from April 2017). The government intends to do this by bringing all non-UK companies that receive income from the UK (e.g. UK rent) within the scope of corporation tax. Currently these companies pay income tax. This change will have a number of other consequences, including reducing the tax rate on UK rent from 20% to 17% (by April 2020). The government will launch a consultation on this proposal at next year’s Budget. It is not expected to extend to UK capital gains.
Reform of loss relief
Other changes that will affect non-UK companies if they become subject to corporation tax are those rules on how losses can be used. The government has confirmed that it will press ahead with a plan to restrict the amount of profit that can be offset by carried forward losses to 50% from April 2017. However, on the plus side, it will allow greater flexibility over what sorts of income carried forward losses can be offset against. This may allow greater flexibility on how losses are used in e.g. Opco/Propco structures, even where the Propco is offshore.
Changes to tax treatment of partnerships
Following a consultation, the government will enact legislation next year to clarify and improve some aspects of partnership taxation. These changes will affect tax administration of partnerships, especially in structures involving tiers of UK partnerships. There is also a possibility of tax being withheld from income distributions if the ultimate investors are not identified to HMRC. The allocation of profits for tax purposes could also be affected. We are expecting to see more details early next month.
Improvements to authorised contractual schemes
The government will legislate to improve the tax treatment of co-ownership authorised contractual schemes (CoACS). The main change will be to provide certainty on their capital allowances treatment, which is complicated by the CoACS being tax transparent. Again, more details expected next month.
Unfortunately, despite the rumours the Chancellor did not announce any changes to the additional 3% SDLT. We had hoped the government might introduce some form of exemption for institutional investors.