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Horizon Scanning | UK Real Estate 2019 

Tax - UK Budget Update

What are the UK tax questions that matter most to the real estate sector? How will we be taxed on our income and gains, how much SDLT will we need to pay and what capital allowances are available are invariably near the top of the list. At least for some investors, the answers to all of these will be changing over the next couple of years. Add to this a new 2% digital services tax that will apply regardless of physical presence and there is plenty to think about following the 2018 Budget.

Tax Update

Non-resident capital gains tax

Unlike in many other jurisdictions, overseas investors have not, until now, had to pay UK tax on UK property gains (other than on certain direct disposals of residential property). However, this is set to change from April 2019, when non-UK residents disposing of UK property (whether commercial or residential) will be liable to UK capital gains tax.  Indirect disposals of UK land held through “land rich” holding vehicles (such as a company, partnership or trust) are also caught. Looking further ahead to April 2020, non-UK resident companies that carry on a UK property business or have other UK property income will be charged to corporation tax on that income, rather than income tax as at present. Together these changes will put UK and overseas investors in UK real estate in very similar UK tax positions from 2020.
 
The government started laying the groundwork for non-resident capital gains in 2013, with the introduction of ATED-related CGT. But this doesn’t make the expanded scope any less of a fundamental change to the taxation of commercial property in the UK. Rebasing to April 2019 will be available where the asset was not previously within the UK tax net and the Finance Bill provisions contain a number of complex elections and exemptions designed to lessen the blow for real estate funds and exempt investors such as entities benefitting from sovereign immunity. The point remains, however, that from next year a number of non-UK resident investors will be facing additional tax on their investments in UK real estate. Time will tell the effect this will have on the market as a whole and the impact on pricing.
 

SDLT: surcharge for foreign buyers and reduction in filing window 

On top of this, Theresa May made a surprise announcement at the Conservative Party Conference in early October of proposals for an SDLT surcharge for foreign buyers of UK residential property. The surcharge is expected to be 1% but other than this, few details have been published. A consultation is expected in January 2019. This is not without precedent: Canada, Singapore and New Zealand have all introduced some kind of foreign purchaser restrictions already and New South Wales introduced a 4% surcharge purchaser duty on foreign buyers in 2016 which was raised to 8% last year. It is not yet known whether there will be any exemptions from the charge but overseas investors in student accommodation, care homes and the like will be keenly watching this space. There are, however, likely to be questions as to how such a charge on non-residents can be made compliant with EU law (for so long as the UK remains subject to this).
More than three years after the change was originally announced, March 2019 will also see the time limit that purchasers (whether UK or non-UK) have to file an SDLT return and pay the tax due reduced from 30 days to 14 days. 
 

Introduction of a 2% digital services tax and helping the high street  

One of the biggest headline-grabbers from Budget 2018 was the new 2% digital services tax, to be introduced from April 2020. The Chancellor acknowledged in his speech that the best solution to the difficulties of taxing the digital economy would be coordinated international action. However, pending broader international agreement, he has decided to go it alone. By targeting revenues from activities such as online market places that are linked to the participation of UK users (rather than physical presence in the UK) this may go some way to addressing the perceived tax imbalance against high street retailers. Smaller stores will further benefit from a one-third reduction in business rates for retail properties with a rateable value below £51,000 for two years from April 2019 (subject to State Aid limits).
 

Changes to capital allowances 

Budget 2018 also saw a number of capital allowances changes announced. Two were of particular note. From April 2019, the capital allowances special rate for qualifying plant and machinery assets (such as long-life assets) will be reduced from 8% to 6%. This is intended to more closely align capital allowances with accounting depreciation. On the plus side, however, new non-residential structures and buildings will be eligible for a new 2% structures and buildings capital allowance (SBA) where all the contracts for the physical construction works are entered into on or after Budget Day.

Brexit 

Ever since the unexpected referendum result in 2016, the nation has been in a curious state of befuddlement and limbo. The process surrounding the UK’s departure from the EU has been enveloped by a dense and numbing political fog, punctuated by seemingly erratic whirlwinds of frenetic activity. Progress as to the terms of our exit - and future relationship - appears simultaneously to stand still, reverse and speed up. But, with approximately three months to go until 29 March 2019, the storm shows no sign of abating yet – if the last few weeks are anything to go by … that said, we can still usefully look at what, if any, progress has been made this year - and what effect this has had on the real estate market.

"The process surrounding the UK’s departure from the EU has been enveloped by a dense and numbing political fog"

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Retail Insolvencies 

In the 12 months ending Q3 2018, the wholesale and retail trade sector saw the second highest underlying of new company insolvencies in the UK with a number of household names dramatically reducing their real estate footprint or disappearing altogether. Casual dining and fashion have been particularly affected, with the number of CVAs for Q3 2018 rising by 200% compared with the same period in 2017.  

"The number of CVAs for Q3 2018 rising by 200% compared with the same period in 2017"

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Overseas Investors 

In recent years, an increasing number of jurisdictions across the globe have either introduced new or strengthened existing rules controlling foreign investment: the UK is no exception and the trend for even greater transparency in UK real estate has continued, especially where overseas investors are involved, driven by the UK Government’s wider push to tackle corruption. Here we look at a number of the key changes which overseas investors in UK real estate need to be aware of; the likely impact of those changes and the reaction from overseas investors so far.

"$13.7 billion of overseas capital piled into the City in 2018 attracted by favourable occupancy rates, dependable investments with yields higher than elsewhere in Europe.” (Cushman & Wakefield: Winning Growth in Cities)

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New Telecoms Code

It is only in recent months that judgments on the new Electronic Communication Code (the “Code”) have started to emerge from the Upper Tribunal (which now decides telecoms disputes). They confirm what many businesses and individuals have sensed over the last year; that what has been referred to by the Tribunal as “the human right to mobile telephony” is likely to trump the human right to enjoyment of one’s own property. The new Code came into force on 28 December 2017 making it much easier for telecoms operators to acquire rights to install and maintain electronic communications equipment on, under or over land. In the absence of reaching agreement with the relevant landowner, an operator has the right to apply to the Upper Tribunal for an “enforced agreement”.

"The human right to mobile telephony is likely to trump the human right to enjoyment of one’s own property"                                                                 

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Tax Update 

What are the UK tax questions that matter most to the real estate sector? How will we be taxed on our income and gains, how much SDLT will we need to pay and what capital allowances are available are invariably near the top of the list. At least for some investors, the answers to all of these will be changing over the next couple of years. Add to this a new 2% digital services tax that will apply regardless of physical presence and there is plenty to think about following the 2018 Budget.

"As previously announced, the taxation of non-UK residents in relation to UK property is to be fundamentally changed"

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Regeneration

Urban regeneration is at a turning point. Even in our present polarised political climate, few would deny that there is a problem with housing capacity and affordability in the UK. Acknowledging the problem is, seemingly, the limit of the consensus. Perhaps one more thing is certain: private developers are inherently a key part of the solution.

"Genuine engagement with residents and other local organisations and institutions early in the development process is crucial"

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Prop Tech

From online estate agents to smart buildings, PropTech is infiltrating the real estate sector in many different ways; in some cases seeking to replace antiquated and inefficient systems and in others introducing new technologies to drive forward an industry that has traditionally been resistant to change. Few Real Estate professionals, whether millennials or baby boomers, would deny that PropTech is changing the Real Estate industry.

"Experts are predicting that technology will play an increasingly prominent role in how occupiers use and operate their Real Estate"

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Explore further topics across our UK Real Estate | Horizon Scanning 2019 publication.

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