There have been several changes to how offshore investors are taxed and nearly all have resulted in increasing the tax payable, reducing the returns on investment; consideration of Capital Allowances to reduce their tax bill should always be made and for offshore companies the savings equate to £190,000 in every £1,000,000 of expenditure incurred.
There have been two main changes to how offshore investors are now taxed:
From April 2019 – Offshore Investors Subject to Capital Gains Tax
Offshore investors are now taxed on gains on their property from April 2019 but it is likely that the effects of this won’t be felt until 2021 or beyond.
Capital Allowances though can be used to reduce the amount of capital gains tax on sale, with SPVs able to potentially further enhance their savings by way of balancing allowances.
From April 2020 – Offshore Investors Brought Within UK Corporation Tax Legislation
Whilst initially the tax rate has fallen from 20% (non-residents) to 19% (UK corporation) there are rumours that the corporation tax rise will be increased in the coming months, potentially up to 24%.
This coupled with restrictions in both interest rate relief and the amount of losses that can be carried forward has given rise to increased tax liabilities for offshore investors, reducing returns on investments.
Capital Allowances are the only way to reduce the taxable profit and there are more opportunities than ever before to reduce both tax on income and on the gain at sale.
Opportunities to Claim
Offshore companies have significant opportunities to claim tax relief through the following:
- Unclaimed allowances on historic expenditure; there is no time limit to making a claim on historic expenditure, as long as you still own the fixtures
- New Structures & Buildings Allowance
- Land Remediation Relief at 150%; this can only be claimed by UK companies so previously excluded offshore entities
Offset Taxable Income & Capital Gains Tax
As an example a property is acquired for £10,000,000 and sells for £12,000,000 after 3 years. Taxable income, per annum, after all deductions, is £300,000.
The tax on all 3 years income could be offset using Capital Allowances (£900,000 x 19% = £171,000).
In addition, the tax on the capital gain (£2,000,000 x 19% = £380,000) could also be reduced by writing down at the relevant rate. If the company were an SPV and ceased to trade then it may also be possible to enhance the tax savings by claiming a balancing allowance.
Capital Allowances More Complex
The Capital Allowances legislation is becoming more complex so there will be changes required by investors to capture these allowances. Every transaction is unique, has a valuation aspect and requires legal entitlement checks, and together with the additional due diligence requirements of Structures and Buildings Allowances they are not guaranteed or simple to claim.
A suitable qualified, regulated, and experienced advisor should be part of the team for every transaction.
What steps should be taken?
- Acquisitions – carry out due diligence at Heads of Terms stage
- Disposals – check if you have claimed and retain the benefit using a S198 election
- Developments / refurbishments /fit outs – review and claim all expenditure
- Historic Expenditure – schedule list of properties and dates and quantum of historical spends