Property Development Tax legislation published and effective from 5 July 2016
On 5 July, as part of the Committee Reading sessions of the Finance Bill 2016, the Government published the draft legislation in respect of overseas property development of UK property. This legislation is effective from the date of publication with tabled amendments to existing legislation.
The legislation is very much in line with the Government’s technical note issued at the time of the Budget and is part of the suite of provisions introduced to combat the perceived "unlevel playing field" between UK and offshore property developers involved in developing UK property.
Under the new legislation, a non resident company will be subject to corporation tax where it carries on a trade “of dealing in or developing UK land", regardless as to whether it has a Permanent Establishment here or not. Non resident individuals are also brought into the scope of UK income tax where they are undertaking the same activities.
Such a trade is defined as “dealing in UK land and developing UK land for the purposes of disposing of it” and must satisfy one of four conditions to fall within the scope of the legislation:
- One of the main purposes of acquiring the land was to realise a profit or gain from disposing of the land;
- One of the main purposes of acquiring any property deriving its value from land (eg shares) was to realise a profit or gain from disposing of the land;
- The land is held as trading stock; or
- One of the main purposes of developing the land was to realise a profit or gain from disposing of the land when developed.
Therefore, for example if an offshore investor holding a long term investment property decided, prior to sale to be redeveloped it, the element of the profit made from the redevelopment will fall within the scope of this new tax.
The profits will be chargeable as they are realised through the company’s accounts, so the timing of recognition of sales may be critical for some offshore property developers.
Further anti-avoidance provisions are also set out in "anti-flipping" provisions to related parties, the fragmentation provisions to prevent offshore developers using contractual or structural arrangements with related parties to shift profits away from the development company, as well as provisions to ensure that disposal of the property deriving their value from UK land are within its scope (for example shares). For these provisions to apply at least 50% of the value of the shares must be derived from UK land value.
Finally, there is a specific clause to counter obtaining a relevant tax advantage by virtue of the any provisions of double tax arrangements, where the relevant tax advantage is contrary to the object and purpose of the double tax arrangements.
For many offshore property developers, serious consideration may well now be made to bring the project onshore, particularly with the level of corporation tax continuing to fall.