Capital Allowances, Trustees and Tax Havens – Time to Act Now
Capital allowances are available when taxpayers incur expenditure on buying, building or refurbishing commercial property and the tax benefits can be significant. It is a non contentious way of reducing a tax bill but in our experience is frequently overlooked. Many property owners holding UK sited property offshore have not claimed allowances. There is sometimes a mistaken view that they are not entitled to or a perception they can avoid any UK tax. However, even if a UK property is held in say Panama or BVI, there is still an obligation to file a UK non resident landlord tax return.
Consequently many offshore non resident landlords and their trustees have historically missed opportunities to maximise the tax relief available to them from capital allowances. It may also be that the availability of debt interest relief has sheltered all the income, or confusion and ignorance over the April 2014 capital allowances rules change, or inadequate tax due diligence in sale and purchase transactions – all leading to missed opportunities to claim.
Recent proposed changes to the reduction in debt interest and the repercussions of the 2014 fixtures legislation means it is more important than ever for trustees and non resident landlords to focus on capital allowances and maximise the tax relief available to them.
Failure to do so will result in an unnecessary and unwelcome overpayment of tax.
Tax havens such as Jersey, Guernsey or Luxembourg have many trusts and trustees who operate there to manage the financial affairs of their non resident landlord clients. Non resident landlords who own property in the UK and receive an income stream are required to submit a non resident landlord tax return and pay tax on any profit generated from the rental.
Non resident landlords have been able to offset any taxable income against debt interest relief, and so may have been able to largely ignore the benefit of capital allowances.
Proposed Changes to Debt Interest Relief – Likely for Non Residents from April 2018
For UK companies (as announced on 16 March in the Budget 2016) a restriction will be introduced from 1 April 2017 for the tax relief they can claim in respect of loan interest deductions. Historically there has been no limit to tax relief claimed in this way.
HMRC have published draft legislation on this and have asked for comments on the proposed restrictions. These can be found under www.gov.uk/government/publications/draft-legislation-corporate-interest-restriction.
However, under the new rules, companies will only be able to claim for finance costs – capped at the higher of £2m and 30% of earnings. Assuming all in interest costs of 5% this could apply to companies with total debt of above circa £40m.
The Government has also raised the possibility of extending this change to non-UK resident companies who receive taxable income from the UK. The rationale is to deliver equal tax treatment. Whilst this will mean non resident landlords will enjoy the benefit of lower tax rates (corporation tax to be reduced to 17% in 2020), it also means that potentially non resident landlords will be caught by the probable changes to debt interest relief too. This is likely to apply some time on or after April 2018.
Consultation on these proposed changes is taking place now with any change being implemented after April 2018.
Debt funding has been integral to the non resident landlord real estate sector and the impact of such changes could be significant. These recently proposed changes to the debt interest relief will significantly reduce a non resident landlord’s ability to reduce the tax due this way; thereby potentially leaving many non resident landlords with significant tax bills going forwards.
To compound the problem, the upturn in the economy with many landlords moving towards positive rent reviews means the improved rental streams will only increase the potential tax due.
Capital allowances have never been so important and by claiming full entitlement, non resident landlords will be able to limit the impact of these proposed changes.
Missed Opportunities to Claim – Confusion and Ignorance
In addition, many offshore trustees are generally not capital allowances specialists and therefore do not recognise the full potential of available allowances.
They process a significant volume of tax returns which can result in the acceptance of the ‘Modus Operandi’. They often don’t have the time or inclination to challenge the information they are given or explore the possibility of improving on the capital allowances being offered during a sale and purchase transaction. Both approaches are risky.
Case Study –Missed Opportunity Due to Lack of Due Diligence
A non resident landlord acquired a property in 2016. To comply with the changes to fixtures legislation in 2014, they entered into a S198 CAA2001 tax election with the vendor to transfer the allowances across at £2. The CPSE enquiries had incorrectly stated that the vendor had held the property as an investment. However, a small level of research from the trustees would have revealed that the vendor was a developer who had built the property and held it as trading stock.
A S198 tax election was therefore irrelevant. The non resident landlord was entitled to make an unrestricted claim on the full purchase price.
Lovell Consulting advises that one of the easiest ways to mitigate the changes is to make sure that historic and current capital allowances have been claimed. Going forwards, the failure to claim allowances will be costly in tax terms.
It is therefore an excellent time to revisit capital allowances planning.
About Lovell Consulting
Lovell Consulting has a highly skilled and expert team, dual qualified in surveying and tax. Frequently construction cost information can be unhelpful and will not provide the level of detail required for submitting a robust capital allowances claim. Lovell Consulting has the expertise to identify the unusual items of qualifying plant and machinery as well as segregate the high level construction costs.
When buying or selling property, it is vital that the benefit of Capital Allowances are not lost. To avoid any potential delay to transactions, it is important that Buyers and Sellers of commercial property have an accurate and useful exchange of information through the use of CPSE. It is recommended to use a specialist Capital Allowances firm such as Lovell Consulting to achieve a positive outcome.
Lovell Consulting purely specialises in Capital Allowances and has provided advice on Capital Allowances for thousands of commercial transactions throughout our 20 year history.
The team at Lovell Consulting can be reached on 020 7329 1300 for further guidance.