In 2017 we saw a significant proposal for change to the taxation of non-resident property investors. The Chancellor's proposal is that from the 1st April 2019 non-res UK funds, individuals and companies will pay tax on gains on increases in value of their commercial property following Phillip Hammond's last budget at the end of 2017.
Further, this tax will apply to the disposal of companies that are holding residential and commercial properties, where more than 75% of its gross value is represented by such UK property (termed "property rich" companies).
Who will be affected?
So it would seem that the Chancellor is trying to even out the playing field for res and non-res investors in the commercial property market.
However, in 2017 the commercial property market was worth 65 billion pounds in terms of investment, of which 40% was non-domestic. As such, given the significant investment that non-res contributes, not only to the commercial property market but also to the UK economy, it would seem likely that there will be adjustments to the proposal prior to 2019, during the consultation process. The adjustments will likely come in the form of exemptions from the tax and it will be interesting to see what exemptions this new tax levy will apply. For example, it would not be surprising if foreign funds were granted some form of exemption from the full brunt of the tax.
It's effect on the market?
Moving forward to 2018 there could be a couple of effects on the market:
- We could see buyers looking to chip price more frequently, on a basis of thinking "I am not going to make as much so I am not going to pay as much." However, you would imagine that this will be wrapped up in cost appraisals before negotiating on price; and
- Given that a significant volume of the UK commercial property market is held in offshore companies, with gains not subject to UK tax, it would suggest that there could be a fundamental shift in holding structures for UK property because the attraction of offshore structuring will be reduced. As I say as above though, the extent of the exemptions which will presumably be granted will determine how much of a shift in the structuring areas occurs.