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Real estate: the ‘go to’ source of tax revenue?

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Following the extension of corporation tax to non-residents trading in UK land in July this year, we now have the proposal announced in the Autumn Statement, to bring non-resident landlords into the charge to corporation tax (rather than income tax) on their UK income profits. This fits with the government’s approach of broadening the scope of UK corporation tax to include the profits of non-residents arising from UK land.
At one level it is good news as the non-residents would benefit from the falling corporation tax rates and be able to deduct loan relationship expenses in accordance with their accounting treatment. We might even see the end of the withholding tax regime under the non-resident landlord scheme to be replaced by corporation tax self-assessment rules.
However, on the other hand, there is a clear indication that the government intends that the interest restriction rules (and carry forward of loss relief rules) would apply to non-resident investors in UK land. This is likely to have a significant impact on the measure of UK taxable profits of a non-resident’s property business because such businesses are typically heavily leveraged with shareholder debt.
In other words, non-residents would be likely to suffer higher UK tax on their UK property business profits. It feels like it cannot be long before the UK government takes the final step and extends the scope of corporation tax to include capital gains realised by non-UK residents disposing of UK commercial property. That would mark the end of any fiscal incentive for non-residents to invest in UK land.
At Budget 2017, the government will consult on the case and options for implementing this change. 
Elliot Weston, Hogan Lovells
Issue: 1334
Categories: In brief