Having quietened down since last year’s Autumn Budget was cancelled, the rumour mill regarding potential tax changes is experiencing a revival as we head towards the next Budget on 3 March.
Recent press speculation has touched on various potential reforms which may be of interest to international investors in UK real estate. We discuss these and rate our personal views of their likelihood of being implemented as part of the next Budget below.
Corporation Tax
Corporation Tax applies where any company sells or otherwise disposes of UK property or receives rental income.
Previously, the rate differed between companies generating small profits and others, until merging into a single rate in 2014. There may be scope for such a bifurcation to return, with some commentators pondering whether different rates may apply to companies which carry on a trade, as opposed to those which simply hold investments. Any decision in this arena will need to balance the revenue generated with the desire for the UK to attract international investment following Brexit.
Likelihood: 4 out of 5 – Corporation Tax rates are currently set at the lowest rate in history, at 19%, which has marked it as a potential contender for any tax rises. It has been reported that even a 1% increase would generate an additional £3.4 billion in revenue.
Capital Gains Tax (CGT)
A report by the Office of Tax Simplification published on 11 November 2020 recommended a closer alignment of CGT and Income Tax rates. CGT is currently up to 20% for commercial properties and up to 28% for residential properties. Income Tax rates are up to 45%. Since the report, there has been speculation and conflicting reports as to whether an increase along these lines could be on the cards.
Likelihood: 3 out of 5 – Part of a review in the pre-Covid era, many of the simplification measures in the report may now fall down the “to-do list”. However, CGT rates are another historically low rate and the need to raise revenue will come into play. A move to align them with Income Tax rates seems unlikely. A smaller increase, perhaps for commercial property and non-property assets, might occur.
Stamp Duty Land Tax (SDLT) cuts extended
A recent report in The Sunday Times put forward an understanding that the current SDLT cuts (or ‘SDLT Holiday’), originally due to end on 31 March, could be extended for a further 6 months. That came as a surprise to many, following a long line of contrary reports in the press. The outcome will be of interest to those currently purchasing properties who are keen to “lock in” the favourable rates.
Likelihood: 3 out of 5 – A recent petition was discussed by a sample of MPs, with the chair concluding that a longer “holiday”, tapering down for higher value properties first, appeared most popular. Any decision would need the approval of the Chancellor of the Exchequer, Rishi Sunak, and Parliament. Reports in the press have been mixed with the Mr Sunak described as sceptical of real estate taxes, but an extension might be welcome news for existing and would-be home owners.
A New Property Tax?
The Sunday Times article also quotes a Treasury source, suggesting that SDLT and Council Tax (an annual tax imposed by local authorities across the UK) could eventually be replaced by a single annual property tax. Forecasting suggests that a 0.48% annual tax would see the revenue for the UK match those today. If introduced at that level, a £5 million London property would attract an annual £2,400 charge. Such a proposal could boost the housing market, with a barrier to purchase being deferred to an ongoing cost.
Likelihood: 1 out of 5 – A group of Conservative MPs, including John Stevenson, recently voiced their support for this measure, but a Government spokesperson replied that they “have no plans to make such changes”..
Wealth Tax?
A recent report by the Wealth Tax Commission has been the subject of questions from clients. Despite the name, the authors are not a commission appointed by Parliament or the Government, and appear to be funded by academics and thinktanks. It recommends a one-off wealth tax, if the Government were to decide to raise revenue. A rate or applicable threshold is not recommended, but various impact studies are included in the report.
Likelihood: 1 out of 5 – The report makes interesting reading as a thorough study of the considerations which need to be balanced in tax policy. Whilst the case is made in an impressively data-led style, our suspicion is that the novel character of such a tax might be seen as too politically eye-catching and high risk when alternative measures are available.
Commentary
Clients are often interested in potential reforms to tax and keen to hear about possible changes. Whilst we cannot advise on such matters, a knowledge of the way tax reforms work can be useful. Tax law changes usually fall into two categories: those announced immediately and those announced after a public consultation. Immediate changes often include changes to rates, tax-free allowances and qualifying limits, such as changing the Corporation Tax rate. Changes which follow a public consultation are often those which introduce new concepts, such as the non-resident SDLT surcharge which includes a unique residence test.
Any thinking about reforms should weigh up the likelihood of an immediate introduction, as opposed to one over a period of time which can allow for later planning. The Government has signalled that it will focus on a long-term economic recovery plan in the Budget. If so, we may see large-scale tax reforms, with a consultation process giving clients the time to consider planning.