As we approach the end of the year, we take a moment to review some of the tax changes announced in the fall budget, some of which will be implemented in the next fiscal year in April 2022. You will find below -below elements that we think are the most interesting for Cadwalader’s clients in the real estate sector. Readers may also refer to our memo published on October 28, 2021 to discuss other tax measures.
New tax regime for holding companies
As part of the government’s broader review of the UK funds regime to strengthen the UK’s competitiveness as an asset management site, the government will legislate to introduce a tailor-made tax regime for holding companies of eligible assets (“QAHC”). This regime targets UK resident intermediary holding companies interposed between the investors and the underlying assets. Taxation in the new regime is based on existing UK tax rules, but with some targeted changes to remove specific tax barriers which are believed to have discouraged the market from establishing asset holding companies in the UK.
The government has conducted two consultations on this regime and on July 20, 2021 published its response to the second stage consultation, along with some of the bills that will be necessary for the new regime to work. The bill prescribed a robust set of eligibility criteria to limit access to the benefits of the new regime to intended users only, requiring that a QAHC be at least 70 percent owned by various funds or certain institutional investors, and that it conducts investment activities without more than insubstantial ancillary trade. In addition, the benefits of the proposed regime will be applicable to the investment activity of QAHC only with respect to certain categories of assets, such as non-UK land, certain stocks and loans, and any derivative contracts relating to any previously mentioned asset.
Under the draft law and the accompanying guidance document, these benefits will include certain changes in corporate tax rules (such as allowing deductions for interest payments on certain equity loans to companies). profits and earnings-dependent exemption, the exemption for capital gains on the disposal of certain UK shares and property and the exemption for profits from the real estate activity of a QAHC outside the United Kingdom, where such profits are subject to tax in a jurisdiction other than the United Kingdom), withholding rules (exempting withholding tax on interest relating to securities held by investors in this QAHC) and rules relating to stamp duty (exempting repurchases by a QAHC of shares and debt capital that it has previously issued from stamp duty and the stamp duty reserve tax).
The Budget confirms that this regime is intended to be legislated in the 2021-22 finance bill, and refers to the two consultations and to the bill. The budget guidance document sets out other benefits that a QAHC will receive under the scheme (in addition to those mentioned in the guidance document released on July 20, 2021). These additional benefits include the exemption of associated profits that arise from loan relationships and derivative contracts and the authorization of certain amounts paid to certain “non-domiciled” residents by a QAHC to be treated as a non-UK source when such persons claim the basis of payment for UK income tax and capital gains tax.
The publications accompanying the fall budget do not include a full set of revised bills for the QAHC regime. It therefore remains to be seen what other legislative changes will be made on the points still under consideration by the Government in accordance with its response to the second stage consultation in July 2021 and the additional changes mentioned in the Budget. Regarding the value-added tax (“VAT”) treatment of fund management fees, the government announced in the fall budget that it will consult on options to simplify the VAT treatment of fund management fees. fund management, an essential element remaining in the scheme before a successful launch can be achieved.
Real Estate Investment Trust (“REIT”)
Responses to the consultation of holding companies on real estate investments led to proposals for changes to the REIT regime. With effect from April 1, 2022, the government has announced that changes will be made to the rules for REITs, including relaxing or removing some of the conditions that determine whether a business qualifies to be a UK REIT.
Among other things, the proposed changes remove the requirement for REIT shares to be admitted to trading on a recognized stock exchange where institutional investors hold at least 70% of the REIT’s ordinary share capital, remove the burden on “holders”. excessive duty ‘when distributions of property income are paid to investors entitled to gross payment and introduce a new simplified’ balance of business’ test so that a REIT is not required to prepare the required additional returns when the complete test is otherwise satisfied.
These changes will undoubtedly be well received by the real estate investment industry and will alleviate certain administrative constraints and burdens, thus further enhancing the attractiveness of the UK REIT regime.
Residential Developer Tax (“RPDT”)
The government consulted on the policy design of the new Residential Real Estate Developer Tax (“RPDT”) and conducted a technical consultation on the bill in 2021. In the 2021 budget, the government confirmed the introduction of the RPDT with effect from April 1, 2022 for companies or groups of companies undertaking the development of residential properties in the United Kingdom with annual profits in excess of £ 25 million. The government announced in the 2021 budget that the RPDT rate would be 4%. The allocation of 25 million pounds sterling can be divided by the group among its companies.
Although mortgaged taxes are not a common feature of the UK tax system, the income generated by the RPDT is intended to be used to finance the refurbishment of coatings and, therefore, the RPDT should be a time-limited tax. . However, the bill does not include a sunset clause, and respondents to the consultations noted that expected revenue (predicted at £ 2 billion over a 10-year period) may be insufficient.
Non-profit real estate developers and rental construction developers have been excluded from the scope of the RPDT.
Businesses and groups engaging in residential property development will need to carefully consider the activities within the scope and any reliefs (such as with regard to loss relief or group relief) that may be available.