28 October 2016
Previously, a non-UK tax resident company was only liable to pay UK Corporation Tax on the profits of a trade carried on by a permanent establishment in the UK. The new rules, contained in the Finance Act 2016, extends the scope of UK tax so that non-UK tax resident companies with profits from trading in and/or developing UK real estate, will be liable to pay Corporation Tax irrespective of whether or not that company has a UK permanent establishment or not. The new rules came into force on 5 July 2016 and shore up the exiting anti avoidance rules relating to land transactions.
The changes will mean that some offshore traders in and/or developers of UK real estate will become liable to UK Corporation Tax; although the bigger players with offshore structures have already been winding down these structures due to the introduction of the UK’s diverted profits tax in 2015.
It may now make sense to use a UK corporate vehicle to carry out UK based real estate trading and development.
There is a let out for projects that start and end within six months, but there are tough targeted anti avoidance rules which prevent the breaking up of projects into smaller segments.
An equivalent change to UK Income Tax applies to profits from trading in UK land by non-resident individuals.
The rules are also of concern to those UK residents (individuals and trusts) who have purchased land assuming that they will benefit from the capital gains treatment. During the consultation phase of the new transactions in land rules, the Income Tax charge only arose where the “sole or main object” of the taxpayer was to sell the land at a profit. But now that the Finance Act 2016 has been passed, the Income Tax charge arises where the main purpose “or one of the main purposes” is to sell the land at a profit. HMRC guidance states that the new rules do not apply to transactions such as buying a property either for the principal purpose of earning rental income, or as an investment to generate rental income and enjoy capital appreciation. This is not what the legislation states, as it permits an Income Tax charge where the principal purpose is to earn rental income, provided that another main purpose is to make a gain from selling the land. This is worrying, and only time will tell whether the legislation is corrected to clarify what was intended; or whether HMRC change their mind.