By Andy Noton, Partner
020 7490 7766
As widely reported following the March 2016 budget offshore property developers are being brought into UK tax irrespective of where they are incorporated and how they carry out their developments. Following the publication of the section 75 of the Finance Act 2016 HMRC finally released guidance before Christmas to assist property owners in determining whether they fall within the new rules. The main conditions are:
A. The main purpose or one of the main purposes of acquiring the land was to realise a profit or gain from disposing of the land
B. The main purpose or one of the main purposes of acquiring the property deriving value from land was to realise a profit or gain from disposing of the land
C. The land is held as trading stock
D. (in the case where land has been developed) the main purpose or one of the main purposes in developing the land was to realise a profit or gain from disposing of the land when developed
Condition A brings immediate concern to all overseas buyers of UK land, who isn’t looking to realise a gain when investing in UK land?
In December HMRC published guidance on how they will seek to apply the new rules, interestingly, included within the guidance is a comment “It is not the purpose of these rules to alter the treatment of activity that is clearly investment.” The fears expressed by some commentators of traditional buy to let investors being caught therefore seem to have been misplaced (although this does seem to be yet another case where failures in drafting require taxpayers to rely on guidance to ensure only the intended targets are caught).
The guidance then goes on to set out various examples which clearly state the most important factor when considering whether a holding of UK property will be subject to the new rules (so that the company is required to register for corporation tax) is the intention when acquiring the property. In theory (and in some cases in practice) this should be relatively easy to determine.However, in reality in a large number of cases buyers of UK property have a number of possible options on purchase and try not to close off all of these options in order to maximise opportunities to earn a return. The uncertainties of the UK property market, vagaries of the planning systems and government policies mean intentions can and frequently do change over a period of ownership.
Going forward (if it wasn’t already critical) purchasers of UK property need to document their intentions on acquisition of property and ensure they take proper advice when intentions change, especially when it involves some form of development and so condition D needs to be considered. The guidance also states that profits will be apportioned when intentions change to develop for sale. The example given is a purchaser of a block of flats which are then let out for several years, the purchaser then decides to build new flats on the site for which they obtain planning permission, build and sell. The profits will be apportioned, normally based on the value of the property when the intention to commence a development activity was formed. It should be noted that this could therefore impact on longstanding investors who did not have to consider these rules on their original purchase.In parallel with the new rules HMRC has created a task force (Offshore Property Developers Task Force or “OFDTF”) to identify cases where offshore developers are not paying the correct tax. The OFDTF will draw on a number of sources of data for identifying property developers (including the land registry) and will consider all forms of tax that are potentially due.
If you have any questions relating to the above, please speak to your contact partner or to Andy Noton.