Until a couple of years ago, the UK commercial property industry enjoyed an extended period of benign tax policy.
REITs and their non-listed equivalent, PAIFs, were introduced, and the top rate of stamp duty stayed at 4% despite numerous raids on residential property from 2010. With the notable exception of empty rates, commercial property avoided major tax raids both in the boom years and under coalition government austerity. We even saw the abolition of the entry charge and other improvements to the REIT regime, and the introduction of a new seeding relief for PAIFs.
But then the beast began to stir, awakened by the financial crisis and its consequences. Prompted by a request from the G20 in 2012, the Organisation for Economic Co-operation and Development has co-ordinated a broad global campaign against base erosion and profit shifting. The main driver was concerns about multinationals not paying tax where they generate their profits (or indeed anywhere else), but the property sector is vulnerable to some of the proposals, such as those targeting the use of debt and double tax treaties.
Earlier this year, the EU jumped on the bandwagon with the European Commission weighing into the normally off-limits world of direct taxation through its “anti-tax
avoidance package”. No doubt encouraged by the Panama Papers revelations, the EU and its member states (including the UK) waved through this land grab, days before the UK’s EU referendum, without even bothering to conduct a consultation or impact assessment.
In the UK, probably the biggest current issue is George Osborne’s decision to restrict the tax deductibility of interest costs with effect from April 2017, and with no grandfathering to protect pre-existing arrangements. This policy is a Base Erosion and Profit Shifting (BEPS) offshoot, so it is not aimed at our industry. But the property sector is structurally reliant on debt and the proposed rules are complicated and problematic. As they stand, even an existing bank loan secured on UK property could be denied tax relief come next April. Let’s hope the new chancellor will think again.
That is not the only tax challenge facing the property industry. In the last budget, institutional PRS investors did not get the expected exemption from the 3% SDLT surcharge on purchases of ‘additional’ residential properties. Other incoming changes negatively affect the tax treatment of offshore developers, worsen the way some fund managers’ carried interest is taxed, and restrict the businesses’ ability to set losses against profits arising in future years. And of course non-residential SDLT has gone up, both on purchases and lease grants.
There is little reason to expect Theresa May’s administration to adopt a more business-friendly approach. This month, her government published proposals to bolster the UK’s disclosure regime for tax avoidance schemes with a power to impose substantial fines on advisers ‘promoting’ such schemes. The UK is by no means an outlier in emphasising tax ‘fairness’ over competitiveness and seeking to distance itself from the 1%. Ten EU countries are still trying to agree a common financial transactions tax, and in the US Clinton and Trump agree that the beneficial tax treatment of carried interest so dear to US private equity fund managers should be scrapped.
So where is the silver lining? Well, I may be clutching at straws, but adversity can be a powerful stimulant. As the Alternative Investment Fund Managers Directive drove the European property industry to collaborate as never before, so a hostile tax environment should spur the UK industry to make the case strongly for commercial property as a force for good in the economy, supporting business and communities.
New BPF president David Sleath is right to argue that this message needs to reach the wider public because popular perceptions matter. It is growing popular disenchantment with political elites, big business and globalisation that is driving more hostile policy on tax (and other areas like financial regulation). As Theresa May said, tax is the price we pay for living in a civilised society. Tax buys not only a safety net for those who need it, but also the conditions business needs to flourish. In these uncertain and populist times, those conditions are getting a bit more expensive.
Peter Cosmetatos is chief executive, Commercial Real Estate Finance Council Europe
