Headline Corporation Tax Rates
General description
From 1st April 2008 the main rate of corporation tax reduces from 30% to 28% and will remain at this lower rate on and after 1st April 2009.
From 1st April 2008 the corporation tax rate for small companies, being those with profits chargeable to corporation tax of less than £300,000 and which are not a close investment holding company will increase from 20% to 21%.
Comment
The reduction for large companies will benefit those companies with profits over £1,500,000 whereas the increase in corporation tax for smaller companies, in many cases compounded with changes to capital allowances will add a significant burden to small companies.
Headline Personal Tax Rates
General description
From 2008-09 the basic rate of income tax will be reduced from 22% to 20%, There is no change to the 40% higher rate of tax.
Comment
This reduction is part of the measures announced in the last budget and continues the strategy of lining up the tax rates applicable to earned and unearned income. There is little tax difference now in extracting profits from companies by dividend rather than bonus.
Capital Gains Tax
General Description
The rate of capital gains tax is reduced from 40% to 18% for disposals on or after 6th April 2008.
Taper Relief will cease to apply for disposal on or after 6th April 2008.
From 6 April 2008 an individual may be able to make a claim for Entrepreneurs' Relief on disposals of :-
- all or part of a trading business the individual carries on alone or in partnership;
- assets of the individual's or partnership's trading business following the cessation of the business;
- shares and securities of the individuals personal trading company;
- assets owned by the individual and used by his / her personal trading company ( or group) or trading partnership.
The effect of the claim is to reduce the tax rate to 10% on the first £1M of gains made in an individuals lifetime after 6 April 2008. Gain in excess of the £1M limit will be taxable at 18%.
Entrepreneurs' Relief will not be available to reduce the effective tax rate unless the property was used in the business of the individual or by his personal trading company or the business comprises the commercial letting of furnished holiday accommodation in the UK.
Similar rules will apply to some trusts and there will be limited transitional provisions where certain gains have been deferred past 6 April 2008.
Comment
For an individual property investor the reduction of capital gains tax from 40% to 18% is welcome. The reduction is not as large as it would seem as prior to the abolition of Taper Relief, a gain accruing maximum non business asset taper relief would have attracted an effective tax rate of 24%. For an individual who could benefit from the business asset taper relief, the effective tax rate of 10% has increased to 18% which represents an 80% tax increase.
Non domiciled individuals
General Description
Individuals who have previously been able to benefit from a remittance basis of taxation face profound changes to their tax treatment as a result of the changes to the current tax regime. Under the draft proposals longer term UK resident non UK domiciliaries would have been liable to tax on their worldwide income and gains. In the event that the individuals paid a £30,000 annual tax charge a remittance basis of taxation would apply. Budget 2008 has provided some welcome reliefs to the severity of some of these changes.
For instance the previous proposals to count days of arrival and departure as days of presence in the UK have been relaxed to only include days when an individual is present at midnight and to ignore periods when an individual is in transit via the UK.
In addition the ability for non UK trusts to rebase assets owned directly by it or indirectly through a company as at 6 April 2008 has been introduced.
It has also been confirmed that for US tax purposes the £30,000 annual tax charge should be creditable against US tax.
Separately it was announced that there would be proposals to tackle an avoidance scheme that seeks to use the UK Double Tax Agreements (DTA) to avoid tax by “artificially” diverting income of a UK resident individual to a foreign partnership comprising foreign trustees and claiming that the DTA exempts the partnership profits from UK tax on the UK resident beneficiaries of the non UK resident trust.
Comment
Since the announcement in the Pre Budget report there have been many calls for alterations to these changes. The ability for trusts to rebase assets owned directly by it or indirectly through a company at 6 April 2008 provides a useful relief, Individuals who directly own shares in offshore companies will not be able to take advantage of the rebasing provisions. This is a very complex area and advice should be sought as soon as possible. It remains to be seen what will actually happen in the wider context of the economy.
Capital Allowance Changes – 10% Special Rate Pool
General description
The Chancellor has confirmed the changes for 2008-09 announced in the 2007 budget whereby the main rate of capital allowances for plant and machinery will be reduced from 25% to 20% and the rate for long life assets will be increased from 6% to 10%.which will be known as the “special pool rate”.
From 2008-09 a new classification of building expenditure will be introduced in the Finance Act 2008 called “integral features”. This expenditure will be included in the separate special rate pool which will attract writing down allowances at a rate of 10%. The short list of assets in this category are electrical systems, cold water systems, certain water heating systems, lifts, escalators, external solar heating and active facades. The eligible expenditure will include replacement expenditure which is defined as expenditure where more than 50% of an integral feature is replaced in a 12 month period.
Additionally the 10% special rate pool will include expenditure on thermal insulation of all existing buildings used for a qualifying business purpose other than residential property businesses.
Comment
This intention to introduce this measure was first made in July 2007 and will generally represent a reduction in tax allowances to landlords. In many instances replacement integral features would potentially be 100% claimed as a revenue item and this change will have adverse tax and cashflow implications.
Capital Allowance – Annual investment Allowance
General description
Finance Act 2008 will include legislation to introduce in 2008-09 a new annual investment allowance (AIA) for individuals, partnerships and companies carrying on a business. The first £50,000 of businesses expenditure on most plant and machinery (excluding cars) will be eligible for inclusion in this allowance. The taxpayer will be able to chose which assets fall within the AIA and include expenditure included in the special rate pool.
There will be extensive provisions to ensure businesses under common control are only able to claim one allowance.
Comment
Whilst this will benefit small property businesses it will not go very far to offset the lower capital allowances now available to property investors and property constructors where the figures involved are generally much higher.
Industrial Buildings Allowance, Agricultural Buildings Allowance and Enterprise Zone Allowance
General description
In December 2007 it was announced that enterprise zone allowances would be withdrawn from April 2011 and not withdrawn on a phased basis over 4 years alongside industrial buildings allowance and agricultural buildings allowance
Comment
This is a deferral of part of the overhaul of capital allowances previously announced.
Stamp Duty Land Tax (SDLT)
General description
- Relief relating to zero carbon flats has been extended to 2012.
- A number of administrative changes in respect of leases for a term of seven years or more where any chargeable consideration other than rent is more than £40,000.
- Alterations to anti avoidance legislation relating to transfers within a property investment partnership.
- Anti avoidance legislation to prevent transfers of property in groups and subsequent sales of the shares in the company.
- Anti avoidance to prevent financial institutions from assisting parties to a transaction to avoid SDLT.
Comment
These are no more than minor amendments to legislation and anti avoidance and there appear to be no changes to SDLT that will significantly impact on the property sector.
VAT: Option to tax Land & Buildings
General description
It is proposed to alter the legislation to make it easier for taxpayers to revoke an option to tax after 20 years and to deal with the following circumstances:
- Opted properties in a VAT group
- Early revocation of an option to tax within a “cooling-off” period
- Automatic lapse of an option to tax six years after the taxpayer ceases to have an interest in a property that had previously been opted to tax.
- The ability, in certain circumstances to exclude a new building from a previous option to tax
- Late applications for permission to opt to tax
There will be new appeal rights.
The rewritten legislation will have effect on or after 1 June 2008.
Comment
An option to tax was first brought into legislation in 1989, the measures introduced today simplify the legislation and improve the practical administration of the option to tax. The first date on which an option can be revoked is 1 August 2009.
Property Authorised Investment Funds
General description
Under the current law Authorised Investment Funds (AIFs) that invest in property, UK Real Estate Investment Trusts ( UK-REITs) or similar foreign companies pay corporation tax on rental and other property income such as property income distributions from UK-REITs. Dividends received from UK companies are not taxable in the AIF and
- The income is distributed from the AIF as a dividend carrying a tax credit;
- Exempt recipients such as charities and pension scheme cannot reclaim the tax credit
Under the new regulations an AIF which invests mainly in property (and certain related securities) will be able to elect for the Property AIF regime to have effect. The Property AIF will receive within the fund rental income and certain other property income exempt from tax. It will make distributions under deduction of tax and basic rate tax payers will have no further liability. Exempt bodies will be able to reclaim the tax and higher rate tax payers will have an additional liability.
There will be regulation of what will qualify as a Property AIF.
Comment
The introduction of the Property AIF provides an option for exempt taxpayer to invest in a portfolio of property investment. It provides an open ended fund to the existing closed-ended UK REIT.
For more information please contact:
Martin Muirhead 020 7566 3705 mmuirhead@kingstonsmith.co.uk
Heather Powell 020 7566 3811 hpowell@kingstonsmith.co.uk
David Benton 01708 759 701 dbenton@kingstonsmith.co.uk
David Montgomery 01737 781545 dmontgomery@kingstonsmith.co.uk
Jonathan Seymour 020 8848 5531 jseymour@kingstonsmith.co.uk
Nigel Birch 01727 896006 nbirch@kingstonsmith.co.uk
Some of the team are currently at MIPIM. If you would like to discuss any property related issues in the meanwhile, please contact David Benton
Kingston Smith has a range of seminars specifically for the property sector. The next seminar 'The Construction Industry Scheme a year later' takes place on 6th May 2008. To book your place or to view the full programme online please click here.