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Budget 2016 Developments in UK property

The Government is continuing its focus on UK real estate and potential leakage of UK tax. It has identified that UK tax on some profits from trading in UK property is being avoided by developers using offshore structures in certain circumstances. As part of its strategy to ensure a level playing field for non-residents and UK residents, legislation will be introduced in the summer to subject developers to UK tax on trading profits derived from land in the UK in the same way regardless of their residence position. The rules are mainly directed at companies and a Targeted Anti-Avoidance Rule will apply to any arrangements put in place after 16 March 2016 in an attempt to counteract the rules.

As the rules currently stand, trading and investment activities are distinct with the former subject to income tax and the latter charged to capital gains tax (or corporation tax on capital gains). Anti-avoidance legislation exists to treat transactions in land as a trade in certain circumstances. Where there is a clear trading activity, a further distinction is drawn between UK residents trading in the UK, non-residents trading in the UK through a permanent establishment (PE) and non-residents trading in the UK without amounting to a PE. In each of these three cases there are provisions to charge UK tax, either under the corporation tax or income tax code, or using Diverted Profits Tax rules. Despite this, HMRC believe that some developers of UK property have still been able to reduce their UK tax exposure using offshore structures which involve fragmentation, enveloping techniques, or avoid the creation of a PE and benefit from double taxation agreements which involve a limited PE definition or threshold which is beneficial to the developer.

The new legislation will ensure that all profits derived from dealing in UK land, or developing UK land with a view to subsequent disposal of it, will be subject to tax regardless of the residence of the entities involved. The rules are intended to apply to part as well as full disposals, and will catch transactions involving property which derives its value from land indirectly. As part of the reform, HMRC have already agreed Protocols to the existing double taxation agreements with Jersey, Guernsey and Isle of Man to close potential loopholes which they identified.

The Technical Note issued by HMRC focuses on the circumstance where development is undertaken by a company, being the more complex scenario. However equivalent rules will be introduced for income tax. Partnerships and trusts carrying on a trade in UK property will be included in the scope. However HMRC are keen to stress that there will be no impact of the new rules on UK developers who are already subject to UK corporation tax on profits in full.

There are no immediate plans to levy a withholding tax to collect the tax that will be payable although this possibility will be considered if compliance proves to be a problem. A specific task force will be created to focus on offshore property developers, landlords and their structures. HMRC are inviting comments on its proposals before 30 April 2016.

As ever, if you would like to explore any of the topics covered in more detail for your circumstances, please do get in touch with Alison Palmer or your usual contact here at Mercer & Hole.

 

 

Date: 17th March, 2016
Author: Alison Palmer

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