The Finance Bill 2017, which comes into effect on 1 April, has been overshadowed by Theresa May triggering Article 50 yesterday, but the changes it brings to companies’ tax relief and profits could have a profound impact on UK property.
Here are three parts of the Finance Bill that Ion Fletcher, director of finance policy at the British Property Federation, thinks you should know about before it takes effect this weekend.
Property exemptions on tax relief rules
Parts of the Finance Bill stem from proposals the OECD put forward in 2015, to stop multi-national corporations from avoiding taxes. One of these proposals was a restriction on the amount of tax relief businesses can get on the interest they pay on their loans, which the UK government has now adopted.
Fletcher said: “If you do something that increases the tax cost of debt capital, then you’d think there would less of it and less demand for it. Less of it would be used and there would be less investment generally.”
However, the bill will introduce “public benefit infrastructure exemptions”, which exempt companies that get most of their income from letting real estate and source their debt from third parties, such as banks. This means most property companies will be exempt and can continue to deduct their interest payments from their taxable profits.
With property being an industry that uses significant amounts of debt, the BPF had feared it could face collateral damage in a move designed to target companies using debt to avoid tax.
Fletcher said: “We’re pleased where we’ve ended up, with the government recognising that real estate investment is generally a low tax risk from the point of view of using debt.
“That’s a much better position than we had originally feared would be the case.”
Extending capital gains tax relief
The substantial shareholding exemption means “qualifying institutional investors”, such as pension funds and insurance companies, do not have to pay capital gains tax when they sell shares in any company. This had previously been restricted to trading companies – ones that make or sell goods or services.
Fletcher said this is an attempt to encourage funds to use the UK as a domicile location. An insurance company, for example, would not have to pay capital gains tax in the UK if it chooses to sell shares in a property special purpose vehicle.
He said: “If you have a property fund that invests across Europe, the government would like the fund vehicle that ultimately holds all of the investments be based in the UK.”
Restrictions on reporting losses
If a business makes a corporation tax loss one year and a profit the next, it can take that into consideration and reduce the amount of taxable profits in the second year. Fletcher said: “It gets recognised for tax purposes that you made a loss, and therefore there should be some tax relief for the fact that you’ve made that loss.”
The Finance Bill 2017 puts a restriction on this, with only 50% of taxable profits above £5m eligible for the offset. For example, a company that made a loss of £10m in one year and then a profit of £10m in the following year would have had no taxable profits in the second year under the old regulations. From 1 April, that company’s taxable profits would be half of its profits above £5m – or £2.5m.
Fletcher said the government has estimated this will bring in £1.6bn more tax between now and 2021-22, and in return it will expand flexibility over the types of losses that companies can use for relief. He added that considering the complexity of the rules, it was a change “I don’t think anyone understands the point of.”
BPF’s verdict
Fletcher said the BPF’s verdict was “more positive than negative”, particularly over the question of interest-related tax relief. However, he added that the government had not gone far enough with some of these ideas. In the capital gains tax relief policy, he suggested expanding the definition of “qualifying institutional investors” – or removing the restriction altogether – and he denounced the restrictions on losses brought forward.
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