The surprise election result has created huge uncertainty for the UK government, not only in regard to Brexit but also as regards its ability to implement purely domestic policies.
The policies thrown into doubt include a number of tax changes. In this article, we look at some of these with particular reference to the position of property businesses.
Furthermore, the surge in support for Labour means that for the first time for many years, we have to take seriously the possibility of a left-wing government. So the tax policies laid out in the Labour Party manifesto now need to be looked at in that light – more of that later.
Where are we now?
When the election was announced, many of the provisions in the draft Finance Bill were dropped, and what was passed was a very slimline Finance Act. It was widely expected that the Conservatives would be re-elected with an increased majority and that the dropped provisions would be re-introduced after the election, probably backdated to April 2017.
It’s now less clear what will be re-introduced, what changes (if any) will be backdated and when. The Queen’s Speech notably excluded the most controversial of the Conservative manifesto proposals and we would expect that this caution would continue to apply to tax changes.
For now, it is important to note that many of the proposed changes (some helpful, some not) that six weeks ago we took for granted would become law, are not yet legislated.
Proposed changes dropped from the Finance Act
- A proposal to bring all UK residential property within the scope of UK inheritance tax, even where it is held within an offshore company. It’s difficult to see Labour opposing this change, so unless the DUP has any strong objections (an exemption for Northern Ireland property perhaps!), it seems likely this will resurface. An important question is whether the delay is an opportunity to do some planning before the new rules start. The difficulty is that if the changes are backdated, you could be faced with an unexpected tax charge. The longer the delay before the new rules are re-introduced, the more difficult it might be to make the changes with backdated effect – although this is not certain.
- Proposed rules restricting corporation tax deductions for interest payments made by large groups. Again these seem unlikely to be vetoed by Labour. Related to these changes was a proposal to bring non-UK resident companies within the scope of corporation tax to ensure that the interest restrictions would apply to them. Again it seems likely that these proposals will now move forward.
- Proposed changes to company tax losses. At present, losses can generally only be carried forward in the company which generated the loss, which can be a problem for property groups which use separate entities for each property. It was proposed that losses could be carried forward against group total profits, but for larger groups only half of profits over £5m could be sheltered. Again it seems likely this will find its way onto the statute book at some point.
- Proposed changes to the Substantial Shareholdings Exemption (SSE). At present, for a gain on sale to be exempt from corporation tax, both the vendor group and the company being sold must be trading. The proposal was that only the company being sold need be trading. This could be helpful to property investment groups which have some trading activities. Although in itself, the proposed change seems fair in creating a level playing field between trading and non-trading groups, the SSE relief itself benefits large and multinational groups, which may make the government nervous about bringing it forward.
A look at the Labour manifesto
The manifesto argues that UK corporation tax rates are the lowest in the developed world, so large companies can be “asked for more” while still keeping the UK an attractive place to do business. The costings suggest the corporation tax rate will be increased in phases to 26% by 2021, and for companies with profits below £300,000 to 21% by 2021.
For income tax, the 45% threshold would start at £80,000 with a new 50% rate above £123,000. This, it is said (probably accurately) will directly affect only the top 5% of earners.
A point to note for buy to let (BTL) investors is that the new interest relief restrictions mean that a taxpayer’s income tax band is determined by their gross rental income (before interest deduction). So many BTL landlords may find themselves in the higher brackets, even though their net income is below the thresholds.
There is a proposed Offshore Company Property Levy. Details are hazy but the proposal seems to be a 15% levy on the sale of property by offshore trusts.
The manifesto promises to reform council tax and business rates. This includes exploring new options such as a land value tax where the levy would be based on the value of the property. It is unclear whether this would extend beyond homes and business property to properties rented out.
The manifesto promises to scrap quarterly tax reporting for businesses with turnover below £85,000. It doesn’t say if this includes landlords, but if so would take smaller landlords outside the proposals.
The manifesto promises to invest in building over one million new homes; to prioritise brownfield sites; develop new towns and make major spending on infrastructure and transport projects. It promises to keep the Land Registry in public hands, to (re)introduce rent controls and to protect homeowners from increases in ground rents.
Labour also promises to act decisively on tax havens.
None of these things will happen, of course, unless and until there is a future Labour government. And, as Mrs May is finding, a minority government has to accept constraints on the implementation of all its policies. Nonetheless, it is a brave (or foolish) person who undertakes planning without taking note of Mr Corbyn’s wish list.
For those who are inconsolable at the very thought of a Corbyn-led Labour government, the Labour manifesto also promises a review into the demise of local pubs and the extension of the business rates relief for pubs to small music venues. So if these things were to come to pass, we would at least, perhaps, be able to relax with a decent pint and listen to some good music!
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