_Autumn Budget 2017 – A Capital Allowances Perspective

Elsewhere, there were significant changes to how overseas investors will be taxed on their UK property assets, bringing them into line with their domestic counterparts.  Capital Allowances can be used to reduce these new tax charges.

In a surprise move, all overseas landlords will be subject to UK tax on the gain from immovable property from April 2019.

In recent years, there has been a drive to tax some overseas owners of high value residential property by bringing them into the scope of Capital Gains Tax (CGT), and the Annual Tax on Enveloped Dwellings (ATED).

The changes announced in the budget on 22 November will see all overseas owners of property in the UK being subject to tax on their gains from April 2019. This includes both the sale of the property and the sale of ‘property rich’ companies or ‘envelopes’.

^{Michael Brownsdon is a Partner in Knight Frank's Capital Allowances Consultancy Team}

The finer details of the tax are being consulted on, but the principle has been ‘fixed’, and the announcement was coupled with anti-forestalling measures so that any restructuring that takes place between 22 November 2017 and April 2019 to reduce the tax liability can be disregarded for calculating the tax due. This new tax is expected to raise £310 million by the end this parliament (2022).

Non-resident corporate landlords (NRCL) will have their gains subject to Corporation Tax (CT) rather than Capital Gains Tax (CGT). Gains within CT are taxed in the same ways as profits from income, so deductions, such as Capital Allowances, can be used to reduce this tax liability.

Property owners will be able to rebase their properties at 1 April 2019 so that tax is charged on gains from that date only. Elsewhere in the budget, indexation allowance for capital gains chargeable to CT have been removed from January 2018, to mirror the treatment of CGT, so by the time NRCL become subject to CT, no indexation will be available. The removal of indexation is expected to generate c. £1.2 billion of additional revenue over the life of this parliament.

What was less of a surprise, but no less impactful, was the confirmation of April 2020 as the date NRCT will become subject to CT rather than Income Tax (IT). Although at first glance this appears as if the tax due will be lower (IT is 20% and CT in April 2020 is due to be 17%), CT is a far more complex tax and has number of recently introduced restrictions, most notably the restrictions on debt interest relief and brought forward losses. HM Treasury expect an additional tax take of £690 million in the first year after introduction.

What is unclear at this stage is how the transitions will be managed. In particular, the period from April 2019 to April 2020, when NRCL will be subject to IT on their rental income and CT on their gains, has potential to cause problems.  

It is not clear whether any of the available deductions accumulated within IT will be transferrable to CT at the time of disposal. HMRC have previously indicated that these benefits should be transferred when NRCL switch from IT to CT, but have not confirmed this point or addressed it in response to the mismatch between the application dates. Hopefully the ongoing consultations will iron out these technical glitches, with one of the solutions being to bring forward the date which NRCL will be subject to CT.

Capital Allowances

With respect to Capital Allowances there were some changes to the Enhanced Capital Allowances (ECA) scheme that encourages investment in energy and water efficient plant.  As there usually is, there will be a tidying up exercise to remove plant no longer considered the most efficient.  

Three new categories (evaporative air coolers, saturated steam to electricity conversions and white LED lighting modules) will be added to the list; two categories (localised rapid steam generators and biomass fired warm air heaters) will be removed from the list, and nine further categories will see changes in the qualifying criteria. Details can be found here. 

Loss making companies have always been able to surrender ECA’s for a cash payment from HMRC.  This scheme was due to be removed in 2018 but has been extended for another five years until 2023.  

At the same time the rate at which the ECA’s can be surrendered has been reduced.  Historically this has been set at 19% of the ECA surrendered.  This made sense when CT rates were 28%, but now they are 19% this cash payment is very generous.

 Consequently, the cash payment rate has been reduce to two thirds of the prevailing CT rate.  The CT rate is now 19%, so the relief rate will reduce to 12.67%. The changes will take effect on 1 April 2018.

Additionally the 100% First Year Allowance (FYA) for businesses purchasing zero emission goods vehicles or gas refuelling equipment will be extended for a further 3 years, until 31 March 2021.

Michael Brownsdon is a Partner in Knight Frank's Capital Allowances Consultancy Team, providing a high quality service to investors, owners and occupiers of freehold or leasehold commercial property. The team provides capital allowances advice on acquisitions and disposals of new and second hand assets, as well as on property developments, alterations, refurbishments and fit-outs.