Loading…

Post-pandemic tax considerations for real estate businesses

With rising inflation and increasing interest rates, the Corporate Interest Restriction Regime (“CIRR”) will likely have a greater impact on businesses. Here we explore how CIRR and the post pandemic tax environment could affect businesses in the real estate sector.

The post pandemic tax environment

Inflation seems set to become a feature of the post pandemic global economy. In response, monetary policy is tightening with the Bank of England having already raised interest rates twice in recent months, and rates are expected to rise further.

While the last decade has been one of low interest rates, it has also been one that has seen a number of changes to UK and global taxation. The effect of these changes is likely to impact an increasing number of groups as finance costs rise. In particular, in line with OECD recommendations, the UK implemented the Corporate Interest Restriction Regime (“CIRR”) with effect from 1 April 2017. 

The CIRR restricts the ability of large businesses to reduce their taxable profits through excessive UK interest expense. The rules operate on a worldwide group basis and, in broad terms, where a disproportional amount of finance cost is incurred by UK entities there is a disallowance of the excess finance cost.  The computations of the restrictions are complex. Groups with less than £2 million of net interest expense within the scope of corporation tax per annum will not need to apply the rules, however they may still be subject to other anti-avoidance provisions such as transfer pricing and thin capitalisation.

As finance costs increase, groups would be advised to monitor their interest costs to ensure they do not have inadvertent restrictions in the UK or other jurisdictions.

With economies opening up, international property groups looking to grow or establish international portfolios will also need to consider withholding taxes on interest. Following the end of the Brexit transition period on 1 January 2021, EU directives like the interest and royalties directive and the parent-subsidiary directive have ceased to apply.  

These directives meant reduced withholding taxes on interest, royalties and dividends paid from or to EU based group companies to nil. This benefited a number of groups, for example for those with a UK holding company, any withholding tax on dividends paid by subsidiaries will represent a global tax cost due to the UK exempting dividend income from corporation tax. In some instances reduced or nil withholding taxes may still be available under the relevant double tax treaty, but the position will need to be reviewed in detail.  

Outside the EU, the UK continues to benefit from being part of a large number of double taxation treaties.  The UK’s tax treaties replicate the benefit of the directives with EU countries but groups looking to expand into the EU would be well advised to carefully consider the structuring of financing and the flow of returns on investment. 

About the author

Liam McKeevor

+44 (0)20 7556 1244
mckeevorl@buzzacott.co.uk
LinkedIn

The post pandemic tax environment

Inflation seems set to become a feature of the post pandemic global economy. In response, monetary policy is tightening with the Bank of England having already raised interest rates twice in recent months, and rates are expected to rise further.

While the last decade has been one of low interest rates, it has also been one that has seen a number of changes to UK and global taxation. The effect of these changes is likely to impact an increasing number of groups as finance costs rise. In particular, in line with OECD recommendations, the UK implemented the Corporate Interest Restriction Regime (“CIRR”) with effect from 1 April 2017. 

The CIRR restricts the ability of large businesses to reduce their taxable profits through excessive UK interest expense. The rules operate on a worldwide group basis and, in broad terms, where a disproportional amount of finance cost is incurred by UK entities there is a disallowance of the excess finance cost.  The computations of the restrictions are complex. Groups with less than £2 million of net interest expense within the scope of corporation tax per annum will not need to apply the rules, however they may still be subject to other anti-avoidance provisions such as transfer pricing and thin capitalisation.

As finance costs increase, groups would be advised to monitor their interest costs to ensure they do not have inadvertent restrictions in the UK or other jurisdictions.

With economies opening up, international property groups looking to grow or establish international portfolios will also need to consider withholding taxes on interest. Following the end of the Brexit transition period on 1 January 2021, EU directives like the interest and royalties directive and the parent-subsidiary directive have ceased to apply.  

These directives meant reduced withholding taxes on interest, royalties and dividends paid from or to EU based group companies to nil. This benefited a number of groups, for example for those with a UK holding company, any withholding tax on dividends paid by subsidiaries will represent a global tax cost due to the UK exempting dividend income from corporation tax. In some instances reduced or nil withholding taxes may still be available under the relevant double tax treaty, but the position will need to be reviewed in detail.  

Outside the EU, the UK continues to benefit from being part of a large number of double taxation treaties.  The UK’s tax treaties replicate the benefit of the directives with EU countries but groups looking to expand into the EU would be well advised to carefully consider the structuring of financing and the flow of returns on investment. 

Looking ahead

Looking ahead

The pandemic has resulted in a significant cost to public finances. As the pandemic eases governments are seeking to raise taxes. Property is likely to remain a source of focus. From a UK perspective there have been a number of changes to the taxation of UK property in recent years.  These have included:

• The profits of the development and investment in UK commercial and residential property being subject to UK taxation following changes which took effect from April 2019;

• Non-resident investors in UK residential property being subject to a 2% stamp duty land tax surcharge from 1 April 2021;

• UK corporation tax rates are due to increase to 25% from April 2023;

The residential property developer tax

It is likely that further changes will be announced. From a global perspective, certain real estate investment vehicles are due to be exempt from the global minimum tax being proposed by the OECD and their wider impact and implementation should be reviewed by any large property group. Governments in many countries are also likely to look at property and the high asset values involved as a means of replenishing public finances, making global property tax an area to watch.

Get in touch
Get in touch

To find out more about the topics discussed in this article, complete the form below and we will be in touch. 

Please complete all required fields above.
This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.
Close iconClose icon backback
Your search for "..."
did not yield any results.
... results for "..."
Search Tags