Real estate is a global asset class and the UK competes well for its share of international capital
Why I’m relaxed on taxing commercial property gains for overseas investors
Tax on gains on UK commercial property for overseas investors is once again in the spotlight following Chancellor Philip Hammond’s first Autumn Budget. There has been an outcry in some circles of the property industry after the Chancellor decided to introduce measures that will charge offshore investors tax on gains on UK commercial real estate for the first time in half a century. It has been suggested that the risk of putting off vital investment from overseas is certainly not worth the sum of money (£160m per annum the Chancellor has said) the Treasury expects to recoup.

Whilst there may be good arguments that the overall level of UK property taxes is too high, I’m much more relaxed about how this change will impact the market. First, however, a quick clarification is required:

What we are not discussing here is the high-profile issue of major multinational corporations, apparently not paying enough UK tax through their application of UK tax law and international treaties. There is a myriad of reasons for this, but it is seen as an excuse, a grey area that is being exploited, it is a wholly different issue to that of tax of gains from UK land – in that case the property is clearly in the UK.  The resulting gain is in the UK.  As such, any tax should be paid here.

Since 1965 the glaring exception to this rule has been the exemption for overseas investors. This is an exceptional policy in Western Europe and what we are seeing here is a simple levelling of the playing field between UK owners that do pay and overseas investors that don’t.

Real estate is a global asset class and the UK competes well for its share of international capital.  I don’t believe that global investors, who are often used to paying tax on gains in other jurisdictions and on different types of investment, will be as alarmed by this change. Factors such as the established, quality, transparent, liquid and diverse market of assets and participants and a robust legal system will remain.  These are fundamental for international investors.
Corporate tax rates are coming down in the UK at the same time
It is worth comparing the new policy with changes to other property taxes. For example, stamp duty land tax is a tax on a straightforward acquisition of a property. When stamp duty changed in 2015 on commercial property (a 1% increase) there was only a limited outcry at the time and then life carried on. The sector remained a strong and upward one.

This is different. It is not a tax on doing business. It’s not a “pay to play”. It’s a tax that only applies where there has actually been a gain.  A profit.  A much more palatable scenario.

Meanwhile, corporate tax rates are coming down in the UK (currently 19% and will be 17% by 2020) at the same time and it is these rates which will likely apply to any such gains after a short transitional period.

Against this background, it is also important to look at the way UK commercial property is commonly owned. For many investors, the standard entry to the UK market is through offshore jurisdictions such as in the Channel Islands in order to ensure that the property owner is offshore, and not subject to UK tax, when selling a property. For this to work a whole management and governance structure must be put in place.

Whilst there are reasons other than tax for this structure, it comes at a cost. There are legal, accounting, advisory and administration costs, which are incurred at the outset and through the life of an investment regardless of any whether there is any gain on a sale. The benefit until now has been paying no tax when a gain is made on sale, provided all aspects have been properly implemented. However, the trade-off is a potential lack of certainty as to whether tax has been correctly minimised through sufficient management and control in the offshore jurisdiction.

Now, the introduction of tax on gains from UK property for offshore investors, particularly where applicable tax rates are shrinking, may lead to a decrease in the popularity of offshore jurisdictions. While the tax paid on gains will rise, all the substantial costs, tax risk and uncertainly arising from owning UK commercial property through offshore jurisdictions, can be reduced. The rate of tax remains favourable against other countries and may well be creditable in the investor’s ultimate home jurisdiction.  A tax on gains in the UK - where tax levels are dropping - may well be a price worth paying to leave behind some of the burdens and uncertainly of being based in an overseas jurisdiction.
Kent Gardner is Chief Executive Officer of Evans Randall Investors