UK Budget – Impact on Property Investment

Published 13 April 2016

The recent UK budget included several measures that will have a direct impact on Isle of Man companies involved in real estate property investment in the UK.

As we have grown accustomed to in recent years there was little good news for non-UK residents, but there were a few crumbs of comfort for the Isle of Man.

Property Development and Trading

It has been common practice for many years for clients to establish a company in the Isle of Man to take advantage of certain provisions of the Double Tax Agreement with the UK that allowed the Isle of Man company undertaking UK property development to legitimately avoid UK tax, providing a Permanent Establishment was not created in the UK.

The UK Government announced in the budget that the terms of the treaties with the Isle of Man, Jersey and Guernsey have been amended with immediate effect so that profits arising from trading in and developing UK property will effectively become subject to UK Corporation Tax.

It is possible clients affected may seek to reduce the impact of those charges by re-domiciling their Isle of Man companies to another jurisdiction, but careful professional advice would be required before making any changes because this is clearly an area of increasing focus for HMRC, as demonstrated by the creation of a task force to “crackdown” on offshore property developers.

Commercial Property Investment

The most significant announcement in respect of commercial property was the change to SDLT.   A new “sliced” system has been introduced that will result in the following rates being effective and figures for the tax payable on a £1m property being used for indicative purposes.

 

Value of Purchase

 

SDLT Rates

Tax Due

£1 - £150K

= 0%

 

150@ 0%          =

0

£150 – £250K

= 2%

 

100 @ 2%         =

2,000

£250K +

= 5%

 

750 @ 5%         =

31,500

 

 

 

39,500

 

Also, a new 2% SDLT rate was announced for high value leases with a Net Present Value of £5m.

However, gains on the sale of commercial property by Isle of Man companies are still free from tax which must be seen as positive news for those Isle of Man businesses providing services in this sector.  Whether the UK government will continue to allow non-UK resident companies to avoid CGT on such properties in the long term remains unclear.

Capital Gains Tax (“CGT”)

The reduction in CGT grabbed the most headlines in the UK media.  The higher rate will fall from 28% to 20% and the basic rate has been reduced from 18% to 10% from April 2016.

The “old” higher rates of tax will still apply to gains on the sale of a residential property that is not a main home, and as such this change will have no impact on Isle of Man investors in UK residential property who have been subject to UK CGT since 6th April 2015.

Peregrine Corporate Services Limited is licensed by the Isle of Man Financial Services Authority.