Business Tax update: Budget 2016 – Profits from trading and developing UK land

Articles 18.03.2016

Business Tax Update:  From the Report Stage of the Finance Bill 2016 (probably sometime in June) all profits from trading in UK property by non-residents will be brought within the scope of UK tax. There will be forestalling provisions taking effect from 16 March 2016.

This will apply irrespective of whether or not the trader has a permanent establishment in the UK. It will capture the profits of a trade insofar as the trade consists of dealing in any estate, interest or right in or over land in the UK, or developing any land in the UK with a view to disposing of any estate, interest or right in or over land (including redevelopment).

The change will apply to disposals that occur after the date the legislation is introduced into parliament. It will therefore catch existing sites where the land is currently owned or in the course of development.

The anti-forestalling provision will apply where between 16 March and Report Stage a person transfers land to a related party who is not intended to be the ultimate recipient; i.e. if the land is moved to rebase the cost. It will apply irrespective of whether or not the transfer is made with the purpose of avoiding tax.  It will also apply in any other case where arrangements are entered into with a main purpose of securing that profits are not subject to the new charge.

The legislation will contain anti-fragmentation rules to prevent part of the profit being syphoned off to a separate development or building company or for the provision of other services through another overseas entity. This will however apply only if it is reasonable to suppose that the two entities are acting together (or concerned in a scheme or arrangement) with the main object of realising a profit from dealing in the land, or from developing the land, or from disposing (directly or indirectly) of the land when developed, and the two entities are “economically connected”.

Entities are economically connected if either –

  • one owns (directly or indirectly) 25% or more of the other,
  • a person owns (directly or indirectly) 25% of both,
  • they are consolidated for accounting purposes,
  • one person has effective control over both (or one has effective control over the other), or
  • the participating condition in TIOPA 2010, s 148 is met.

The provision will also apply to sales of shares in land-owning companies or other property deriving its value from land. This is aimed at the creation of special purpose vehicles (SPVs) to hold one house or unit each, so that the SPV itself is an investment company but the owner of the SPVs is indirectly trading in the land by trading in the SPVs.

CBW Tax Reaction: This is a massive deterrent to foreign developers and housebuilders. Whether it is sensible at a time when there is a desperate housing shortage is questionable. It seems unlikely that it will stop foreign ownership of UK land. It is more likely that non-residents will develop to invest instead of to deal.  This is likely to lead to a large number of arguments with HMRC, which they do not have the resources to deal with.  It will also boost the residential letting market at the expense of owner occupation, which seems to conflict with Mr Osborne’s incentives to enable young people to get onto the property ladder.

This is not the first time that the UK has ridden roughshod over double tax agreements.   Nevertheless it is depressing that the government should be willing to tear up its international treaties if that will enable it to get a little extra money.

Further information

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