- UK Real Estate Budget News
- June 1, 2009
- Law Firm: Faegre & Benson LLP - Minneapolis Office
Here are some highlights summarised from the 2009 Budget, relevant to those with Real Estate interests.
Temporary Increase In Capital Allowances on Plant and Machinery
If capital expenditure on plant and machinery is incurred in the 12-month period beginning 1 April 2009 (6 April 2009 for individuals) and would otherwise qualify for allowances at 20 percent per annum (i.e., the items are not integral features which only get allowances at 10 percent), the allowance for 2009/10 will be 40 percent. The idea is to encourage businesses to bring forward planned refurbishments and capital expenditure to the current year.
In 2009/10 a 40 percent rate is expected for buyers of secondhand commercial property that contains fixtures. However, the seller would only be able to continue claiming the remaining allowances at 20 percent to the extent the expenditure remains as part of its pool. Bear in mind that, on a purchase of commercial property, most of the items of plant and machinery will now generally be integral features, and only qualify for allowances at 10 percent. Integral features are not affected by the 40 percent rate. Long life assets, expenditure on cars and expenditure on assets for leasing do not qualify for the 40 percent allowance.
The £50,000 annual investment allowance of 100 percent of cost in the year of expenditure remains unchanged.
Enhanced Capital Allowances for Environmentally Beneficial Technologies
One hundred percent first-year allowances are available for investment in environmentally-friendly products approved by the Department of Energy and Climate Change. Uninterruptible power supplies, air to water heat pumps and close control air conditioning have been added to the list.
Release of Trade Debt/Property Business Debt
Currently, when a creditor releases a connected debtor from a trade debt or a property business debt, the creditor obtains no tax relief but the debtor is taxed on the amount released. This can apply on the waiver of rent owed. From 22 April 2009, legislation will be introduced to ensure that where such a debt is released, the loan relationship rules will apply, so that if the debtor is connected with the creditor, no tax charge arises, and if the parties are not connected, the debtor is taxed (unless the release is part of a statutory insolvency arrangement) and the creditor obtains relief.
Property Trading Business-Making Losses
Property traders (businesses and companies) will be able to carry back trading losses for three years instead of one, and so obtain repayments of tax paid on past profits. This will have effect for company accounting periods ending between 24 November 2008 to 23 November 2010, and tax years 2008–9 and 2009–10 for unincorporated businesses. The relief will apply to later years first. The carry back to the immediately preceding year is unlimited, but the carry back beyond that is restricted to losses of £50,000 per year.
Taxation of Dividends
Since 2007, HM Revenue & Customs (HMRC) has been consulting on changing the rules on how dividends from foreign subsidiaries are taxed, to make the United Kingdom more competitive and to ensure compliance with EU law.
From 1 July 2009, the tax treatment of dividends paid within groups is changing, both within UK groups (currently exempt) and by a foreign subsidiary to a UK parent, (currently taxable subject to a tax credit).
The new legislation will treat dividends in the same way. Most will be exempt, subject to anti-avoidance provisions. UK groups and groups with foreign companies need to ensure they understand the new regime, and in particular what dividends will fall outside the exemption.
Individuals Receiving Dividends From Nonresident Companies
Since 6 April 2008, UK resident individuals holding less than a 10 percent interest in a nonresident company and receiving dividends have been entitled to a nonrepayable tax credit of one-ninth of the dividend so that the tax rate has been 32.5 percent for higher-rate tax payers, as with a dividend from a UK company. This rate is now extended to holdings of more than 10 percent in non-UK resident companies, provided that the company is in a "qualifying territory"—i.e., has a double-tax treaty with the UK which contains a nondiscrimination article.
Investment In Nonresident Property Funds—Capital Gains Tax
Rules are to be introduced from December 2009 to enable UK resident investors in offshore vehicles which may be treated as tax transparent in the UK to be treated as holding units in a tax opaque vehicle for capital gains purposes so they can ignore underlying disposals of property by the fund and merely be taxed on their own disposals. The new regime will not apply to foreign partnerships which will remain tax transparent for UK capital gains purposes. This may simplify the capital gains tax treatment of holding interests in non-UK property funds.
New Offshore Fund Regime
The offshore fund rules ensure that UK investors who do not pay tax on income arising to offshore property funds pay income tax rather than capital gains tax when they sell their interests in the fund. Detailed legislation for the new offshore funds regime was enacted in 2008. The new regime will apply from 1 December 2009 with a new definition of offshore fund which uses a characteristic-based method as opposed to being linked to the definition of collective investment scheme. Funds which report income ("reporting fund") so that the investors pay tax on the income on a year-by-year basis, whether or not it is distributed, will be able to allow their investors to pay capital gains tax on the disposal of their interest in the fund as opposed to income tax.
Changes are to be introduced from 22 April 2009, so that:
a) A property company which restructures to try to become a real estate investment trust (REIT) and lets property to a group company does not qualify as carrying on tax exempt property rental business
b) Owner-occupied businesses are excluded from the tax exempt business
c) "Tied" premises may qualify—enabling pub REITs to be considered
d) REITs can issue convertible preference shares—to provide a more flexible means of raising funds
Alternative Finance Investment Bonds
Changes will be made in the Finance Act 2009 to enable land to be transferred to a bond issuer taking security in alternative finance arrangements, without adverse stamp duty land tax (SDLT), capital gains tax and capital allowances consequences for the bond issuer or the bond holders.
Allocating Capital Losses and Gains Around UK Groups
It is not possible for a group of companies to claim group relief for a capital loss. Currently, it is possible to elect for a different UK group company to be treated as making a disposal outside the corporate group, so that gains and losses are set off within the same company but the rules are inflexible in certain respects. For disposals that occur after the enactment of the Royal Assent of Finance Bill 2009, it will be possible to simply transfer chargeable gains and losses around a group by joint election.
SDLT and Social Housing
Registered providers of social housing (RPSHs) in accordance with the Housing and Regeneration Act 2008, which could include profit-making companies, are replacing registered social landlords (RSLs). Currently SDLT relief applies to certain acquisitions carried out by RSLs and legislation will be enacted in the Finance Act 2009 to ensure that the new RPSHs, when acquiring a property with the assistance of a public subsidy, obtain an SDLT exemption. Furthermore, simplifications to the SDLT relief for purchasers under rent to shared ownership schemes are being introduced from 22 April 2009.
SDLT Exempt Threshold for Residential Property
Residential property acquired before 1 January 2010 will benefit from an exempt threshold of £175,000. For transactions where "substantial performance" occurs on or after 1 January 2010, the exempt threshold reverts to £125,000.
SDLT and Leasehold Enfranchisement
Currently the SDLT relief for leasehold enfranchisement can only be claimed by a "right to enfranchise" company. This relief will be extended to all those who are exercising statutory rights of leasehold enfranchisement from 22 April 2009. Accordingly, it will apply to nominees or appointees who acquire the freehold of a block of flats on behalf of leaseholders.
HMRC has published a consultation paper with draft legislation concerning extending the disclosure regime to residential property with a value of at least £1 million. This is surprising as HMRC has been told there is not material SDLT avoidance in this area, introducing arrangements for HMRC to identify users of disclosed SDLT schemes for residential and commercial property by making users complete a specific form within 30 days. HMRC says this will enable it to know how widely a scheme is used, prioritise those that require remedial legislation, and launch enquiries on particular transactions. No doubt it is also designed to have a deterrent effect.
Tax Accountability of Senior Accounting Officers
HMRC intends to introduce from Royal Asset of Finance Bill 2009 a new measure to put obligations on companies and their officers to ensure the tax returned is correct. "Large" companies, as defined in Companies Act 2006, are required to notify HMRC of the name of their senior accounting officer. That officer is then obliged to take reasonable steps to establish and monitor accounting systems within his/her company that are adequate for tax reporting, specify any inadequacies and confirm that notification of those inadequacies has been made to the company auditors. Penalties will be charged on the senior accounting officer personally and the company for a careless or deliberate failure. HMRC does not say in its press release whether the penalties will be tax related, but just says blandly that there will be "no additional burden for those companies or their officers."
Those asked to be a "senior accounting officer" may well be advised to vary their employment contract to include an indemnity. But if the individual is reimbursed by the company, would this be a taxable receipt? Furthermore what advice will such officers need to take?
Name and Shame List
The names of taxpayers that deliberately understate tax due, overstate claims, or do not notify HMRC—leading to a loss of tax of more than £25,000—will be published by HMRC. There will be an appeal process before publication of names.
Landfill Tax Rate Rise
The standard rate of landfill tax increases by £8 on a tonne to £48 per tonne.
HMRC will publish a spotlight giving notice of selected avoidance schemes that it believes are ineffective to discourage potential users. HMRC will then challenge those schemes, and presumably ask for the maximum penalties.
Tax Increment Financing
The government will consider innovative methods of financing infrastructure projects by means of cash raised from the increased property tax base (rates) deriving from development.
The government plans to target the construction industry to address what it perceives as the incorrect treatment of construction workers as self-employed, as opposed to employees. This could result in substantial claims from HMRC against those companies for unpaid pay as you earn (PAYE) and national insurance. This continues a trend already seen in HMRC's inspections.