2016 uk real estate technical tax conference · 2020-01-23 · • restricted income tax relief for...

2016 UK Real EstateTechnical Tax conference

www.pwc.co.uk

13 October 2016

PwC

UK Real Estate TaxNetwork Leader

Introduction and Welcome

Robert Walker

October 20162016 UK Real Estate technical tax conference

Slide 1

PwC

Agenda

Speaker Time

Breakfast and networking 8.00 – 9.00

Introduction and welcome Robert Walker 9.00 – 9.10

UK and global prospects post BrexitWhat does 2017 look like for the real estate industry

Dr Andrew Sentance CBE 9.10 – 9.30

Changing landscape for Real Estate structuring:• BEPS action 4 implementation• Trading in land rules• Substantial Shareholdings Exemption (SSE)

consultation• Loss restriction provisions

Tim Jones, Fiona Gaskell,Neil Anthony, Stephen Chewterand Tom Ewins

9.30 – 11.00

Break 11.00 – 11.20

Real Estate Investment Trusts/Property AuthorisedInvestment Funds/Co-Ownership Authorised ContractualSchemes

Paul Emery 11.20 – 11.35

Residential property Helen Whitfield, Liam O’Doherty,Paula Letorey and Mallinath Kini

11.35 – 12.30

Megatrends Leo Johnson 12.30 – 13.00

Wrap up and lunch Robert Walker 13.00


2

PwC

Need to know

Ask questions from your smart phone

• We’ll try to answer questions as we go

• If we run out of time will come to backto you on unanswered questions

Connect your phone to the wifi(code on table)

Open your web browser

Go to www.slido.com

Enter event code #pwctax

Type your question and send

123

4

5


3

PwC

Dr Andrew Sentance

UK and global prospectsin a post-Brexit economy


Slide 4

PwC

Dr Andrew Sentance

Senior Economic Adviser,PwC

UK and global prospectsin a post-Brexit economy


Slide 5

PwC

Outline

• Economic recovery – the story so far

• Brexit is happening – so what does it mean?

• Economic outlook and impact of Brexit

• Implications for property and tax policy


6

PwC

Global growth close to long-run trend% per annum change in world real GDP andconsumer prices

Source: IMF World Economic Outlook, October 2016

-1

0

1

2

3

4

5

6

7

2000 2002 2004 2006 2008 2010 2012 2014 2016

GDP growth Inflation 1980-2010 GDP growth trend


7

PwC

Outlook for global economy in 2016

PwC September 2016 Global Economy Watch

Russia

Germany

UK

US

Brazil

India

Spain

Key

Canada

Mexico

South Africa

Australia

Japan

Italy

Greece

Ireland

France

1.3

1.5

2.1

-3.8

2.6

1.4

4.2

1.8

1.6

0.9

0.3

7.7

-1.3

2.6

6.5

0.6

-1.7

x.x = GDP growth in 2016

China


8

PwC

UK leading G7 growth league before Brexit% annual GDP growth, year to 2016 Q2

0.0% 0.5% 1.0% 1.5% 2.0% 2.5%

Japan

Italy

Canada*

US

France

Germany

UK

Source: OECD Quarterly National Accounts


9

PwC

Economic consequences of UK leaving EU

• Uncertainty associated with an economic shock (negative, short-term)

• Disruption to trade and investment (negative, medium/long-term)

• Restricted migration from EU (mixed)

• More regulatory freedom (positive, long-term)

• Lower fiscal contributions (positive, but small)


10

PwC

Sterling – A long term viewUK effective exchange rate, Jan 2005=100

70

80

90

100

110

120

130

Jan-80 Jan-83 Jan-86 Jan-89 Jan-92 Jan-95 Jan-98 Jan-01 Jan-04 Jan-07 Jan-10 Jan-13 Jan-16

EER Ave 1980 - 2007 Ave 2009-2016

Source: Bank of England October 20162016 UK Real Estate technical tax conference

11

PwC

What has happened so far?

• Pound has fallen – to c.$1.20-1.25 and around €1.10

• Political turbulence – new PM; new gov’t formed; opposition in turmoil; policyuncertainty

• Increased business uncertainty. Confidence indicators weakened in July but have sincebounced back

• Mixed economic indicators – consistent with slower growth but not recession

• No clarity on exit process until plan is developed, Article 50 is triggered andnegotiations begin

• Despite general air of uncertainty, businesses continuing to operate as normal,pending more policy clarity


12

PwC

How might uncertainty be resolved?

• UK political situation stabilises (Now-End 2016)

• Post-Brexit negotiating plan agreed (Early 2017?)

• UK exit negotiations (2017-19?)

• Implementation of EU exit agreement (2020/21?)

• But many other uncertainties may emerge along the way:

- Negotiating stance of other EU members

- Possible General Election or second Referendum?

- Further political turmoil/instability in UK and EU

- Scottish/Irish independence issues


13

PwC

Post-Brexit scenarios

• Baseline scenario: UK takes 3-5 years to establish new trading relationship with EUand other major trading nations (FTA scenario)

• Optimistic scenario. UK remains in European Economic Area (EEA) and hence keepsclosely integrated with European trading partners. Minimises business disruption anduncertainty

• Downside scenario: High degree of political and economic uncertainty creates arecession, and UK has to fall back on WTO rules for trade with EU partners and othercountries


14

PwC

Economic scenarios for UK post-BrexitIndex of GDP, 2005 = 100

Sources: ONS and PwC Post-Brexit Scenarios, updated for most recent data

95

100

105

110

115

120

125

130

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Pre-Brexit Central scenario (FTA) Downside (WTO) Upside (EEA)

Impact on GDP by 2020 vs Remain

scenario = 1.5-5.5%; Central estimate = 3%


15

PwC

UK GDP growth, 2016-2020% per annum change in GDP

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

2010-15 2016 2017 2018 2019 2020

Pre-Brexit EEA FTA WTO

Source: ONS and PwC forecasts


16

PwC

How might economic policy support growth?

• Monetary policy – no scope for further relaxation

• Fiscal boost – constrained by deficit

• Easing of business regulation

• Support for small business, skills and enterprise

• Transport infrastructure, including airport decision

• Relax constraints on housing supply, inc planning regime

• Tax reform – simplify, remove anomalies and improve employmentand investment incentives


17

PwC

Outlook for global economy in 2017

PwC September 2016 Global Economy Watch

Russia

Germany

UK

US

Brazil

India

Spain

Key

Canada

Mexico

South Africa

Australia

Japan

Italy

Greece

Ireland

France

1.9

2.2

2.7

0.0

1.5

3.3

0.9

1.4

1.0

1.0

7.7

0.3

2.8

6.5

0.5

1.0

x.x = GDP growth in 2016

China

2.3


18

PwC

UK consumer spending relatively resilient% per annum change in GDP and consumer spending

-5.0%

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

GDP Consumer spending

Source: ONS and PwC forecasts – updated from July 2016 Economic OutlookOctober 20162016 UK Real Estate technical tax conference

19

PwC

Key conclusions and implications

• UK economy has weathered the initial Brexit shock, but weaker growth stilllikely 2017-19

• Investment expected to be the main driver of weaker growth – likely to impactcommercial property

• Policy initiatives to support housing investment and cushion growth may createopportunities

• Post-Brexit economic model still unclear – lack of clarity likely to persist into2017/18

• Brexit will be a long process. Full implications will not unfold until 2020s

• For many business decisions, ‘carry on as normal’ makes sense for now, butlong-term investments should be tested against a range of scenarios


20

PwC

More information and links

PwC UK Economic Outlook and Global Economy Watch:http://www.pwc.co.uk/services/economics-policy/insights/uk-economic-outlook/ukeo-nov2015-economic-prospects.html and

http://www.pwc.com/gx/en/issues/economy/global-economy-watch.html

Blogs: http://pwc.blogs.com/economics_in_business/andhttp://andrewsentance.com/the-hawk-talks

Email: [email protected]

Twitter: @asentance


21

PwC

Tim Jones, Fiona Gaskell,Neil Anthony, Stephen Chewterand Tom Ewins

Changing landscapefor RE structuring:


Slide 22

PwC

Changing landscape – last year

• The Base Erosion and Profits Shifting(‘BEPS’) package

• Diverted Profits Tax (‘DPT’)

• Restricted income tax relief for interest forresidential landlords

October 20162016 UK Real Estate technical tax conference23

PwC

Changing landscape – this year

• BEPS action 4 & the proposed ‘interestcapping’ provisions

• BEPS action 2 & the ‘hybrid mismatch’provisions

• BEPS action 15 & the multilateralinstrument

• Diverted Profits Tax

• Extension of scope of corporation tax tonon-resident companies with a trade ofdealing in or developing UK land

• The updated ‘Transactions in UK land’provisions

• The ‘Anti-Fragmentation’ provisions forall companies trading in UK land

• SDLT rate increases (residential andcommercial)

• Consultation on reforms to corporationtax loss relief

• Proposed Substantial ShareholdingsExemption reforms and a potential‘Qualifying Fund’ exemption

• Seeding relief for PAIFs and CoACS andCoACS capital allowances consultation

• Impact of new UK GAAP changes fornon-resident landlords

• Partnership taxation consultation

• Making Tax Digital

• Lease accounting changes


PwC

BEPS action 4 implementation


Slide 25

PwC

Consultation on interest deductibility

• UK implementation of BEPS Action 4

• Critical changes to interest deductibility where corporate taxdeductions for interest exceed 30% taxable Earnings beforeinterest tax depreciation and amortisation (EBITDA)

- Interest on shareholder/fund/profit related debt likely to benon-deductible

- Deductions for interest on third party/bank

• Scope of the rules – corporates only

- Non-resident landlords (NRL’s) – are they in? if so, how andwhen?

- Real Estate Investment Trusts (REITs) – British PropertyFederation (BPF) proposal being reviewed by HMRC

• Commencement – 1 April 2017

- Split accounting period for tax for straddle period (just andreasonable apportionment)

• Draft legislation expected after Autumn Statement (5 Dec)


PwC

Interest deductibility – Recap and summary

• Formal consultation on design of new rulesissued in May (consultation ran to August)

• Confirmed policy outlined in businessroadmap, but provided much more detail.

- UK Interest deductions limited to fixedratio of 30% of interest:EBITDA ratio for‘UK Group’

- A group ratio test based on interest:EBITDAwill be introduced for highly leveragedindustries which can increase 30% number

- Existing debt cap rules to be repealed. Newabsolute limit on UK net deductions = groupnet interest deductions (current debt capallows comparison to gross deductions)

- A de-minimis amount of £2m will alwaysbe deductible for the ‘UK Group’ (even ifthat exceeds 30%, group ratio and modifieddebt cap)

- Public benefit projects would be exempt forexternal debt

- Restricted interest may be allocatedbetween group companies to reduce theirnet tax-interest expense (but not to agroup company which does not have anet tax-interest expenses);

- Restricted interest is carried forwardindefinitely and may be deducted in futureperiods if there is capacity:

- Spare capacity can only be carried forwardfor three years


PwC

Group ratio – Example 1

Group ratioA Plc(UK)

B Ltd(UK)

Interest on

bank debt 60

Accounts A Plc B Ltd Group

Operating profit/Tax EBITDA 0 100 100

Interest expense (60) - (60)

Profit before tax (60) 100 40

Calculation of Group Ratio (WW Group)

Qualifying group-interest expense (1) 60

Group profit before tax (2) 40

Group interest expense (3) 60

Group EBITDA (4)=(2) + (3) 100

Group ratio (1)/(4) 60%

Tax deductible interest expense (60%1 UK Tax EBITDA 100) 60


PwC

Group ratio – Example 2

A Sarl(Luxembourg)

B Ltd(UK)

Fund

Interest on

bank debt 60

IBL interest – 10

IBL interest – 10

Fund debt not treated as external debt for group ratio

Accounts A Sarl B Ltd WW Group


Net Interest expense - (70) (70)

Profit before tax 0 30 30





Group EBITDA (4)=(2) + (3) 100


Tax deductible interest expense (60%* UK Tax EBITDA 100) 60


PwC

Real estate industry – Key issues

• Group ratio – Will not always give deduction forthird party debt

- International group with diverse debt profile

- Tax to book differences

o Property revaluations

o Capitalised interest

• Definition of Group – Especially relevant for funds

• Joint Ventures

• REITs

• Corporate NRLs


PwC

Group ratio – Example 3 (Diverse debt profile)

Accounts A Plc B Ltd C Sarl UKGroup

WWGroup

Operatingprofit/TaxEBITDA

0 100 100 100 200

Interestexpenses

– (60) (40) (60) (100)

Profit before tax 0 40 60 40 100





Group EBITDA (4)=(2) + (3) 200


Tax deductible interest expense(50%1 UK Tax EBITDA 100)

50

Interest on

bank debt 40

A Plc(UK)

B Ltd(UK)

C Sarl(Luxembourg)

Interest on

bank debt 60

Group ratio test


PwC

Group ratio – Example 4 (Tax to book differences)

A Plc(UK)

B Ltd(UK)

Interest on

bank debt 60

Same example as Example 1 – But BLtd has recognised an increasein value of properties of 50(non-taxable as no disposal)

Group ratio

Accounts A Plc B Ltd Group


Property revaluation 50 50

Interest expense (60) - (60)

PBT (60) 150 90





Group EBITDA (4)=(2) + (3) 150


Tax deductible interest expense (40%1 UK Tax EBITDA 100) 40


PwC

What is a group? – Group ratio and de-minimis

• Based on the grouping used for IFRS consolidated accounts(similar to the current Debt Cap regime);

• The group will comprise the ultimate parent and all entities thatare consolidated on a line by line basis in the parent’sconsolidated financial statements;

• IFRS 10 – Investment Entity exemption from consolidation maymean the ultimate parent for subsidiaries is not the master fundplatform (or possibly other holding companies)

• An associated company not eligible for consolidation would notbe in the Group, but would be treated separately for the purposesof the rules;

• The ultimate parent must be a company or similar entity(no individuals, or most partnerships);

• The ‘UK Group’ are all UK tax resident companies and UKPermanent Establishments (PEs) of foreign companies in theworldwide group as defined above.

HoldCo 1

Subsidiary 1

Fund

HoldCo 2

Subsidiary 2


PwC

Group ratio – Example 5 (JV Co)

Interest on

bank debt 50

Interest on

bank debt 50

A Ltd(UK)

JV Ltd(UK)

B Ltd(UK)

Interest on

debt 50

Interest on

debt 50

50% 50%

Impact of Group Ratio

• All UK – No different debt profiles oraccounting differences.

• However, JV Ltd is not in a group with either A Ltdor B Ltd. A Ltd and B Ltd are however bothrelated parties.

• JV Ltd qualifying interest expense for group ratio istherefore nil.

• No group ratio uplift.

• Deduction limited to 30% fixed ratio = 60

Accounts A Ltd B Ltd JV Co


Net Interest expense (0) (0) (100)

PBT (0) 0 100


PwC

Changing landscape – Hybrid mismatches

• Wide ranging and very complex corporation taxrules to neutralise tax advantages created byhybrid payments. Rules can be applied to eitherthe company making the payment, receivingthe payment, or companies making direct orindirect payments which ultimately fund thehybrid payment.

• The amount of disallowance/income taxedshould be the proportionate amount requiredto neutralise the hybrid effect.

• The rules generally only apply to relatedparty/controlled group payments orstructured arrangements, investors in apartnership are generally treated as a singleperson – So rules still generally apply topayments to transparent fund vehicles even ifno single investor has >25% interest.

• There is no specific relief for exemptinstitutional investors – In many cases thetest of hybridity is by reference to a taxablecompany in the same territory.

• Key risk indicators for structures identifiedto date:

- US Check the box elections for companies tobe treated as disregarded or partnerships forUS tax – This can bring in external debtdeductions if double deductions betweenrelated parties

- Use of reverse hybrid entities – Partnershipsregarded as companies in other territories

- Use of hybrid instruments (tax deductiblefor paying entity, but equity for investors –e.g. PEC’s, PPL’s);

- Branch mismatch structures


PwC

Trading in land/transactions in UKland rules


PwC

Background to changes

• Budget day announcements followed greater visibility of property tradingstructure (e.g. following the introduction of Diverted Profits Tax (DPT)).

• Draft legislation giving effect to the budget day announcement on the abovewas published on 5 July.

• These changes take effect from 5 July except in relation to the ‘anti-avoidance’measures which are effective from budget day (as previously announced).

• Separate provisions introduced for companies and non-corporates (egindividuals).


37

PwC

Summary of changes

The extensionof the scope of UKcorporation tax tonon-UK residentcompanies trading inland.

These changes broadly fall into four categories

The replacementof the existing‘Transactions in land’anti-avoidanceprovisions.

The introductionof a new ‘anti-fragmentation’ rule.

The anti-avoidanceprovisions,which took effectfrom budget day(16 March 2016).

1 2 3 4


38

PwC

The extension of the scope of UK corporation tax tonon-UK resident companies which carry on a trade ofdealing in or developing UK land

• Basic description of charge

• Changes to tax treaties

• Commencement of a new accounting period

• Amendments to the ‘pre-trading’ expenditure rules

• Implications for group relief

• Amendments to s.189 CTA 2009(post-cessation receipts)

• Implications for other sources of income(e.g. property rental income and interest income)and chargeable gains

• Interaction with Diverted Profits Tax (‘DPT’)


39

PwC

The replacement of the existing ‘Transactions in land’provisions in relation to UK and non-UKresident companies


40

PwC

Direct disposals of UK land

In order for the provisions to apply where there is a direct disposalof land, any of the following conditions must be met in relation tothe land:

• Condition A is that the main purpose, or one of the main purposes, ofacquiring the land was to realise a profit or gain from disposing of the land.

• Condition B is that the main purpose, or one of the main purposes, ofacquiring any property deriving its value from the land was to realise a profitor gain from disposing of the land.

• Condition C is that the land is held as trading stock.

• Condition D is that (in a case where the land has been developed) the mainpurpose, or one of the main purposes, of developing the land was to realise aprofit or gain from disposing of the land when developed.

(S.356OB)


41

PwC

Meaning of ‘main purpose, or one of the mainpurposes… to realise a profit or gain from adisposal…’ test

• Former legislation ‘sole or main object…’

• Consequences of the new definition

• HMRC clarification – e.g. should not apply where:

‘Property is acquired for investment, usually rental income, but over time thatproperty may increase in value and a profit may therefore be realised from aneventual disposal’

• Application to properties which are developed?


42

PwC

Indirect disposals of UK land

These provisions apply where:

• A person realises a profit or gain from the disposal of any property which (atthe time of disposal) derives at least 50% of its value from land in the UK, and;

• The person is a party to, or concerned in an arrangement concerning some orall of that land, and;

• The main purpose, or one of the main purposes of the arrangement is to:

- Deal or develop that land, and

- Realise a profit or gain from a disposal of property deriving the whole orpart of its value from that land.


43

PwC

Other relevant matters

Application of double tax treaties Sale of company holding UK land astrading stock


44

PwC

The ‘anti-fragmentation’ rule

Profits of another ‘associated’ person(broadly defined) are effectively includedin the calculation of the taxable profits by treatingthem as the same person.

That other person must be making a ‘contribution’to the development of theland or other activities directed towards realising again from the disposal of the land.

‘Contribution’ means any kind ofcontribution including, for example, the provisionof professional or other services,or a financial contribution (including theassumption of a risk).

Excludes profits which are otherwise within thecharge to UK income or corporation tax.


45

PwC

Arrangements for avoiding tax

Broadly drafted Only example discussed withHMRC relates tomanipulation of the‘land rich’ definition

Ability to ‘override’ doubletax treaties


46

PwC

Practical implications

Changing landscape

• Direct disposals:

• Non-resident nowwithin charge to CT?

• New transactions in UKland provisions

• Any impact of anti-fragmentation rules

• Indirect disposals:

• Continuing treatyprotection?

• Sales of 50% or less ofshares could be caught.

Due diligence issues whenacquiring SPVs holdingUK property

• Do the ‘Profits from trading inand developing UK land’ applyto the SPV?

• Potential application ofAnti Fragmentation Provisionswhere there is a trade ofdealing in or developingUK land

- Interest deductibility ?

- Costs of ‘stock’

- Other expenses

Potential SPA issues

• Warranties and indemnities

• Scope of potentialinsurance cover

• Who is the chargeable person?


47

PwC

SSE consultation


PwC

Consultation on SSE

• Current Substantial Shareholding Exemption regime:

• Introduced in 2002 to address:

- The concern that tax on gains on share disposals was influencingcommercial decisions

- The incentive to use complex offshore holding structures

• Gives an exemption from corporation tax for gains/losses arising on certainshare disposals

• Has been of limited use to the property industry because of thetrading requirements

• Concerns that it is overly complex with uncertainty over its application


PwC

Consultation on SSE

• The consultation document sets out 5 options for extending theavailability of SSE:

- A comprehensive exemption

- Exemption subject to investee trading test

- Exemption subject to investee test other than trading

- Amended trading tests at investee and investor level

- Changing the definition of ‘substantial shareholding’

• Other design modifications such as shares held within a partnership

• Consideration of an SSE qualifying fund


PwC

Consultation on SSE

• Consideration of an SSE qualifying fund

• Reflect the fact that funds investment gains are not generally subject to UKcorporation tax

• Could target funds with certain characteristics e.g. widely held, regulated,subject to minimum distribution requirement

• Reflect the reduction in cost from targeting groups that currently have theirholding platforms overseas

• UK REITs?


PwC

Loss restriction provisions


PwC

Consultation on Loss Utilisation

• Two key objectives:

- Restrict use of losses brought forward such that only 50%of profits over £5m may be offset by such losses

- Increase the use of losses brought forward so lossesaccrued after 1 April 2017 can be carried forward againstother types of income and used by other group companies

• Commencement – 1 April 2017

- Split accounting period for tax for straddle period (justand reasonable apportionment)

• Difficult transition rules (b/f losses at 1 April 2017 get worstof both worlds – Restricted to 50% of profits, but can not beused against other income streams and in other companies).


PwC

Basic example

Loss utilisation from 1 April 2017:

• Companies with profits in excess of £5m – Canonly offset 50% of profits with losses

- UK 1 loss offset reduced to 50

- UK Holdco Non trade deficits (NTD’s)trapped

UK Hold Co

UK1 UK2

NTD’s c/f 125

Trade Profits 600

Trade losses c/f (150)

Trade Profits 100

Trade losses c/f (75)

Losses incurred after 1 April 2017

• B/f losses can be group relieved and offsetagainst other types of income.

• NTD’s in UK Holdco can be surrenderedto UK 2

• Excess losses in UK 1 (25) can also besurrendered to UK 2.

• UK 2 can utilise any losses b/f in the group upto 50% of taxable profits. Therefore reliefclaimed for full 300.


PwC

Real estate industry – Key issues

1Fixed term projects/SPV’s

• Lump sum income in final year of project

• Income does not exceed 50% of lossescrystallised in earlier periods

• Full relief not available for losses(despite profit being economically made)

2REIT’s

• PID calculation includes loss c/f offset.Distribution could therefore need to exceedeconomic profit to date in Real EstateInvestment Trust (REIT) company

• Exemption for ringfenced profits (in line withother regimes where group relief not available)

• Cannot disclaim capital allowances

3Non-resident corporates with no

Permanent Establishment (PE)

• Current proposals only apply tocorporation tax.

• Position of NR companies outside the chargeto Corporation Tax raised in consultationprocess.

4Impact on deferred tax

• Recognition

• Netting


PwC

Interaction with interest capping rules

• Interest capping rules applied to thecalculation of taxable profits.

• Loss restriction applied to profits afterinterest capping rules.

Company A

Taxable EBITDA 100

Interest deduction (30)1

Taxable profits 70

Loss offset (35)

Profits subject to tax 35

1 Assumes no uplift for group ratio


PwC

Impact on transactions


PwC

Potential acquisition of Property SPV

Property SPV

UK Property

Vendor

Purchaser

• Purchaser is considering the acquisition of all theshares in Property SPV, a company incorporatedin Luxembourg owning a commercial property inthe UK

• Property SPV’s intentions regarding the propertythat it holds are unclear

• The property has recently been developed and letsince planning permission was obtained

• Significant expenses have been incurred byProperty SPV on the development includinginterest costs on loans from group companiesfunding the development

• Although Property SPV has a majority ofLuxembourg resident directors, there is onedominant UK resident director

Proposed transaction

Initial due diligence findings


PwC

Due diligence considerations

Trading in land rules

Intention regardingthe property –Trading v investmentdistinction

1

Considerations forPurchaser of a changeof intention afterpurchase

2

Interest costs on loanfrom associatedcompany

3

Implications of anypotential Vendorliability for Purchaser

4


PwC


Availability of losses1

• Establishing the quantum of any losses and their type

• Deferred tax assumptions made regarding theirrecoverability

Capital allowances2

• Have all available allowances been pooled?

• Scope to disclaim allowances given change in lossrelief rules?


PwC


Sale and Purchase A considerations

• Warranties and indemnities

• Scope of potential insurance cover

• Who is the chargeable person?


PwC

Modelling considerations

How is the acquisitionto be financed and whatassumptions should be madeabout the deductibility ofinterest?

1

What impact does thisacquisition have on anygroup ratio calculation?

2

Assumptions to be madearound the use of anypotential losses

3


PwC

The Changing Landscape for Real Estate

• Impact on investment decisions/pricing

• Increased scrutiny/issues arising in transactions

• Compliance risk due to increased complexity

• Holding structure – no ‘one’ solution

• Nature of underlying activities

• Onshore vs offshore

• Opaque vs transparent

• Quasi-transparent structures


PwC

REITs/PAIFs/CoACS

Paul Emery


PwC

REITs

c. 20 REITs by 20122007 – REITs introduced 1

Removed significant barrier to entry2012 – 2% entry charge abolished 2

Captive REITs held by institutions2012 – Close company rules relaxed 3

4 REITs AIM listed and 5 on CISE2012 – Listing rules relaxed to allowAIM/CISE

4

c. 45 REITs with market cap of £51bnand more UK residential REITs?

2016 – Where are we now? 5


PwC

PAIFs

Fund managers reticent and uptake slow2008 – PAIFs introduced and SDLT relief onAUT conversion 1

More conversions of AUTs to PAIFsbut significant LBTT costs reScottish property

2015 – Scottish LBTT introduced with noAUT to PAIF conversion relief 2

c.15 Open ended funds with NAV > £1bnof which 6 PAIFs

2008 – 2016 – Investor pressure to convertfor direct tax benefits of PAIFs

3

At least 2 PAIFs remain suspended2016 – Brexit 4

Significant uptake in PAIFs?2016 – Seeding relief from SDLT introduced 5


PwC

Legal framework

REIT PAIF CoACS

Legal entity Listed company Open ended investmentcompany

Contractualarrangement

FCA Approval N/A Approval required Approval required

Regulation Listing authority AIFMD AIFMD

Balance ofbusinessrequirement

75% of profit andassets must relate toproperty rentalbusiness

60% of net income mustbe property investmentincome

N/A

Shareownershiprequirements

Shares must be widelyheld

Genuine diversity ofownership

Must be institutionalor invest ≥ £1m (GDO requirement for seedingrelief)


PwC

Tax treatment

REIT PAIF CoACS

Fund level taxation Exempt on property incomeand property gains

Exempt on property income;gains; interest income

Transparent for income andoutside scope for gains

Investor level taxation

• UK individuals

• Eligibility for ISA

• UK corporates

• Non-residents

• UK pension funds

• Overseaspension funds

PID ‘deemed’ to be propertyincome

IT on Property IncomeDistributions (PIDs), CapitalGains Tax (GTS) on shares

YES

CT on PIDs, gains on shares(other div may be exempt)

Distribution received net

Distribution received gross

Treaty rates may apply

PID ‘deemed’ to be propertyincome

IT on dividends, CGT onredemptions

YES

CT on PID/interest, gains onshares (other div may be exempt)

Distribution received net

Distribution received gross

Treaty rates may apply

IT on income as arises

IT on rent, CGT on redemptions

NO

CT on income and gains

IT on rent

No tax

IT on rent (unless UKregistered pension scheme)

WHT on distributions 20% on PID (inc. gains) 20% PID and interest N/A (but NRL schememay apply)

SD/SDRT on transfers 0.5% (except AIM) Should be nil Exempt

Availability of SDLTseeding relief

No Relief (3 year clawback) Relief (3 year clawback)


PwC

Residential property

Helen Whitfield, LiamO’Doherty, Paula Letorey andMallinath Kini


PwC

Residential property – An area of change andopportunity

Demand outstripping supply Government support forvehicles and incentiveswhich help delivery supply

The divide between Londonand the rest of the country

Local authorities with stretchtargets to delivery supply

Regulatory changes impactinghousing associations

Tax changes impactingreturns for private landlords


PwC

Tax issues impacting vehicles delivering supply

Typical residentialdevelopment structures

Stamp Duty Land Tax(SDLT) pitfalls ofpublic/private sectorjoint ventures

Key changes affectinglandlords

Construction industryscheme

Agenda

1 2

3 4


PwC

Typical residential structures


PwC

Typical structures to deliver residential property

Build for sale structure

Build for investment structure for housingassociations

Build for investment structure for funds

Hybrid trading and investing


PwC

1. Build for sale single company structure

Direct sale (Freehold or long lease)

Professional/land costsConstruction costs

Developer


PwC

1. Typical build for sale single company structure

Construction costszero-rated – No VAT

Some VAT incurred onprofessional and/or landcosts – 20%

Except VAT recovery on whitegoods and other fittingsblocked from recovery

No VAT cost for Developer

VAT recovered on the basisthat the freehold sale or longlease is zero-rated

VAT Considerations


PwC

1. Typical build for sale single company structure

Profits subject to UKcorporate tax/SingleSDLT charge

Opportunities in relationto contaminated landrelief and R&D

Sale of shares still potentiallysubject to SSE andEntrepreneurs’ relief

Use of losses

Deductibility of debtand expenses fromoverseas investors

Annual Tax on EnvelopedDwellings (ATED) reporting

Other tax considerations


PwC

2. Typical build for investment structure forhousing associations

Direct letting (short lease)

Professional/land costsConstruction costs

Housing association

Single Company Structure with short leases to tenantsMore common for Housing Associations


PwC


VAT on professional fees could be removed by using Design and Build contracts

Single Company Structure with short leases to tenantsMore common for Housing Associations – VAT Considerations

Construction costs zero-rated– No VAT

VAT incurred on professionalfees – 20%

No VAT recovery by housingassociation due to exemptlettings

Maybe an issue for seller ofland therefore ‘Golden Brick’schemes can be used

VAT on land costs may beeliminated if land purchasedby housing association

Therefore VAT cost onprofessional fees


PwC


Single Company Structure with short leases to tenantsMore common for Housing Associations – Other tax implications

Charitable exemption from SDLT andcorporation tax

Inefficiencies where activity takes place outsidea Housing association or Council. For example,Golden Brick planning can result in a singleSDLT charge and corporation tax, subject tothe ability to gift and profits back to the charity


PwC

3. Typical build for investment structure forfunds – Residential split ownership structure

Property held as an investment let to tenants on short leases

VAT exempt (no recovery on costs)

ManCo

PropCoProfessional/land costs

Residential dwellings

>21 year lease


PwC

3. Typical build for investment structure – Splitownership structure

VAT drivers – Residential property

PropCo has fullVAT recovery oncosts up to grant oflease – No VAT costof construction

PropCo makesongoing exemptsupplies –Considercontinuingregistrationand capitalgoods scheme

4

PropCo grants longleasehold interestto ManCo which iszero-rated

Consider howservice chargeis managed

3

Construction costszero-rated – NoVAT chargedby contractors

VAT incurred onother costs –Professional feesbut also maybeVAT onland purchase

Exception forwhite goods andother fittings

No VAT recoveryfor ManCo but VATonly incurred onongoing costs

1 2

5 6 7 8October 20162016 UK Real Estate technical tax conference

81

PwC

3. Typical build for investment structure forfunds – Split ownership structure

• Taxable rental income split between PropertyCompany (PropCo) and Operating Company(OpCo)

• SDLT group relief on the grant of thesub lease

• PropCo and OpCo may need to be kepttogether on exit to avoid SDLT and VATclawbacks (SDLT if the lease to OpCois assigned)

Other tax implications

• Non-UK PropCo, in NRL regime, is attractive

• ATED and Non-Resident CGT need to beconsidered

For offshore investors


PwC

VAT drivers – Care homes and studentaccommodation

• Contractor not able to zero rate supply

• Propco can recover VAT if it makes zero rated supply

• But OpCo issues certificate to allow zero rating

• Issue of certificate places restrictions on future use and disposal

• Supply of accommodation to students/care residents – VAT Exempt thereforeOpCo partly exempt – Depending on other activities

• After lease PropCo makes exempt supplies – Ongoing registration andcapital goods scheme to be considered. CGS more significant as VATincurred on all costs


PwC

4. Hybrid Investment/trading structure

ABC PropCo UK

NewCo

Lease exceeding 21 years

Sells property

Student accommodation (RRP)or Care Home

ABC OpCo


PwC

4. Hybrid Investment/trading structure

Combination of treatments1

Separation between investment and trading assets at thepoint of acquisition2

Split investment and trading activities in offshore entities?3


PwC

Public/Private Sector JVs and SDLTelephant traps


PwC

Public private JVs

Central and localgovernmentscommitment toboost the housingsupply means we areseeing more andmore JVs with theprivate sector

1Each sector havedifferent experiencesand objectives

2

Transactions at anundervalue4 Bodies which break

tax group5

Complextransactions withmultiple landtransfers overmoney lease

3

Procurement/stateaid – If the rightstructure is not inplace from outsetchange is hard

6


PwC

What transactions are subject to SDLT?

• SDLT arises on the transfer of a chargeable interest which includes:

- An estate, interest, right or power in or over land in the UK, or

- The benefit of an obligation, restriction or condition affecting the value or any such estate,interest, right or power

- But excludes an ‘exempt interest’ (e.g. a non-exclusive licence to occupy)

PwCOctober 20162016 UK Real Estate technical tax conference

88

PwC

Identifying all of the SDLT consideration

• ‘Any consideration in money or money’s worth given for the subject matter ofthe transaction, directly or indirectly, by the purchaser or a person connectedwith him’:

- Cash

- Release or assumption of debt (not to exceed MV of land)

- Carrying out of works

- Provision of services

• Value Added Tax – The chargeable consideration shall be taken to include anyVAT chargeable in respect of the transaction.

• Must be apportioned on a just and reasonable basis.


PwC

Market value transactions

• Provisions deem the transactions to take placeat market value (or consideration if higher) ifthe purchaser is:

- A connected company

- A connected partnership, OR

- A land exchange

• In certain specific situations where carrying outworks are not deemed to be consideration.

• For unascertainable/deferred consideration


PwC

Timing, number and subject matter ofa transaction

• Substantial performance

• Conveyance

• Both?

Triggers1

• Market value transactions

• Phased developments

Implications2


PwC

Reliefs

These include:

• Group relief

• ‘sub sale’ relief

• Sale and leaseback relief

• Compliance with planningobligation

• Compulsory purchase orders

• Multiple dwelling relief

• Reorganisations effected bystatutory provisions

• Charities relief

• Certain acquisitions by RPs

• ‘PFI’ relief


PwC

What rates is SDLT charged at

Non-residential Rate

Consideration <= £150k 0%

Next £100k (portion from £150k – £250k) 2%

Portion above £250k 5%

Residential rate

Consideration <= £125k 0%



Next £575k (portion from £925k – £1.5m) 10%

Portion over £1.5m 12%

Additional 3% for second homes and buy-to-lets


PwC

Case study 1 – 10 year housing JV

Discuss

SDLT

• Timing and value of SDLT cost (single or multiple,substantial performance, market value provisions)

• Quantum of SLP relief and clawbacks

• Unnecessary transfers

CT

• State aid

Facts

• Land owned or assembled bylocal authority

• Contributed to a JV over10 years

• Houses sold to an RP andthe public

LLP

LANDCPO?Building contract

Public

Local authorityHouse builder

RP


PwC

Case study 2 – Exchanges

Issues

• Exchange meaning consideration is higherof MV or consideration provided

• Just and reasonable allocation ofconsideration

• Sale and Leaseback relief

Facts

• LA gifts land to DevCo worth£4m

• DevCo is to construct a mixtureof flats for sale and use by a RP

• RP grants nomination rights tothe LA

• DevCo is to construct acommunity building in a cornerof the site and transfer thefreehold back to the LA

Lease over community building

Local Authority

Gift of land worth £4m

RP

Lease overSocial housing

Development Co


PwC

Case study 3 – 10 year JV where some plots havenegative value

• Land drawn down in multiple stages

• Some high value plots

• Some plots with negative value

Facts £m

Plot 1 10

Plot 2 5

Plot 3 (5)

Plot 4 (5)

Total 5


PwC

Recommended approach

• Consider the structure and who is underwriting costs early on

• Keep it simple

• Limit land transactions

• Undertake transactions when land values are low or ensure leases haverestricted value

• Take great care with structuring documentation to ensure reliefs are available


PwC

Construction industry scheme


PwC

Construction industry scheme

What we’re seeing in the market1Costs of getting it wrong2Specific issues3

• Mainstream contractors

• Deemed contractors


PwC

What we’re seeing and costs ofgetting it wrong


PwC

What we’re seeing …..

• HMRC raising queriesbased on data analytics

• Issues of non-compliancebeing found

• Inconsistent decisions/lackof understanding of teammembers leading tonon-compliance

• HMRC arguing that certainclients are mainstream andnot deemed

Mainstream contractors

• Lack of understanding ofthe timing requirement ofwhen to register/de-register

• In/out of scope and impacton registration

• Extent of the application ofRegulation 22 to theoperations (constructionwork on premises to be usedfor own trade)

• Issues as for Mainstream ifrequired to be registered(opposite)

Deemed contractors

• Turnaround time forapplication – Grosspayment status.Cash flow issues?

• Issues arising whencontracts encompass CIS,but only becomes apparentwhen Contractor makesreference to deduction

• If new subcontractor underdeduction – How to getcredit (if small PAYE/no Corporation Tax etc.)

• Overseas companiesunaware of requirements toregister and then obtainingrelevant information

Sub-contractors


PwC

Consequence of non-complianceFinancial and Reputation

Penalties for latemonthly returns

Penalties for incomplete orincorrect monthly returns

Missing records

CIS Status

Parties totransaction

Relationshipwith HMRC


PwC

Mainstream contractors


PwC

Legal vs. beneficial party

Key considerations

• Which entity is the contractor for CIS purposes i.e. which is legally party to theconstruction contract?

• Which entity pays subcontractors to carry out construction works?

• As the legal owner holds the property on trust for the beneficial owner, any legal obligations wouldneed to be discharged by the legal owner in accordance with its duties as 'trustee', i.e. in the course ofmanaging the property for the benefit of the beneficiary

Entity A Entity B

Subcontractors

Held on trust

Legal Owner Beneficial Owner

Property


PwC

Inter-group recharges

Questions

• Which contracts includeconstruction operations?

Subcontractors

Company

Top Company

Contract to reimburse


PwC

Deemed contractors


PwC

Deemed contractor – Timing of registration

When to register?

• Upfront contract

• Grace period

• De-register?

In summary, timing of registration is dependent on how the construction spend arisesbut best practice would be to deal with the registration as soon as possible.

Breach £1m p.a on average for construction

Year 1 Year 2 Year 3


PwC

Property investors versus property developers

Property developers (including speculative builder)

• Mainstream contractors – Business activity is the creation of new buildings, or the renovationor conversion of existing buildings, or other civil engineering works

Property investment businesses

• Deemed contractor – A property investment business acquires and disposes of buildings forcapital gain or uses the buildings for rental

Is it possible to be both?

• Property investor undertakes activities attributed to those of ‘property development’:

- Considered a mainstream contractor during the period of that development

- CIS position may be reconsidered on completion of that contract to reflect ‘new substance’


PwC

Key changes affecting landlords


PwC

The changing tax landscape for UK residentialproperty

• Annual Tax on Enveloped Dwellings(ATED) – April 2013

• Non-Resident Capital Gains Tax(NRCGT) – April 2015

• Stamp Duty Land Tax:

- Changes to residential property –4 December 2014

- Additional 3% for second home –1 April 2016

• Removal of wear and tear allowance –April 2016

• Interest relief restriction – fromApril 2017

• IHT for non-domiciled individuals –April 2017

Direct impact

• Increased tax on dividends – April 2016

• Reduction in corporation taxrates – decreasing to 17% by 2020

• Reduction in CGT rate to 20% from April2016 (remains at 28% for direct disposals ofresidential property)

Indirect impact


PwC

Residential vs. Commercial: Individual landlords

Event Residential Commercial

At acquisition SDLT at progressive rates(up to 12% with possible3% supplement)

SDLT up to 5%

Ongoing compliance Tax relief on finance costsrestricted to 20% (by 2020)

Removal of wear and tearallowanceof 10% per annum and reliefgiven on actual replacementspend from April 2016

Tax relief on full finance costs

AIA allowance £200k

On sale CGT up to 28% CGT up to 20%


PwC

Impact of changes to interest deductibility

Assumptions

Current(Individual)

April 2020(Individual)

April 2020(Company)

Rent yield (6%) 6,000 6,000 6,000

Interest cost (4.50%) (3,825) (3,825) (3,825)

Profit before tax 2,175 2,175 2,175

Income tax (45%)/Corporation tax (17%)

(979)-

(1,935)-

-(370)

Profit after tax 1,196 240 1,805

Dividend tax (38.1%) N/A N/A (688)

Net return 1,196 240 1,117

Effective tax rate 45.0% 89.0% 48.6%

Additional ratetax payer

Original cost of

£100,000Loan-to-Value of

85%Interest rate

4.5%


PwC

Ownership structure – Tax implications:April 2020

58.7%

89.0%

133.2%

186.7%

48.6% 48.6% 48.6% 48.6%

17.0% 17.0% 17.0% 17.0%0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

120.0%

140.0%

160.0%

180.0%

200.0%

2.5% 3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.0%

Eff

ec

tive

tax

rate

(%)

Interest costs (%)

Personal ownership

Corporate ownership (extracting through dividends)

Corporate ownership (no extraction)

Assumptions:

LTV – 85%

Personal ownership (breakeven point; 4.85%)


PwC

Transferring a residential property portfolio toa company

• SDLT at progressive rates (up to 15%), unless properties held by apartnership or at commercial rate if 6 or more properties

• CGT relief if business present

• Properties ‘stepped up’ to current market value on transfer to company

• Tax relief for finance costs (subject to new rules for corporates fromApril 2017)

• ATED filing obligation, but exemption available

Tax implications on incorporation

• Banking and other commercial considerations

• Increased dividends tax rate 38.1%

• Decreasing corporation tax rate 17%

• Sale of shares subject to CGT at new rate of 20% (gains realised after6 April 2016)

Other considerations

Loan

Bank UK Co


PwC

Premium SDLT rate

Changes from 1 April 2016

• +3% of SDLT for purchases of UK buy-to-let properties and second homes (assumes over£40k in value).

No exemptions

• Companies/funds/individuals – No exemption for larger investors.

• Transfers involving six or more properties can be treated as commercial.

Band Old SDLT rate New additional SDLT rate

£0 – £125k 0% 3%

£125k – £250k 2% 5%

£250k – £925k 5% 8%

£925k – £1.5m 10% 13%

£1.5m + 12% 15%


PwC

Key tax changes affecting landlordsdiscussed today

Residential property:

A corporate structure may be the answer1

3% SDLT for additional residential property:

No exemptions2

More information on these changes can be found at:

https://www.pwc.co.uk/webcast_forms/2016-04-ef252-the-tax-landscape-in-the-uk-residential-property-market.html


PwC

Any questions?


PwC

Megatrends

Leo Johnson


PwC

Contact details

Robert WalkerPartner, Real Estate Tax UK Network LeaderOffice: +44 (0)20 7212 2324Email: [email protected]

Andrew SentanceDirectorOffice: +44 (0)20 7213 2068Email: [email protected]

Tim JonesDirectorOffice: +44 (0)20 7212 5450Email: [email protected]

Liam O’DohertyDirectorOffice: +44 (0)161 245 2384Email: [email protected]

Fiona GaskellSenior ManagerOffice: +44 (0)20 7804 2356Email: [email protected]

Neil AnthonySenior Tax ManagerOffice: +44 (0)20 7213 4916Email: [email protected]

Stephen ChewterSenior ManagerOffice:+ 44 (0)20 7804 4624Email: [email protected]

Leo JohnsonPartnerOffice: +44 (0)20 7212 4147

Email: [email protected]

Paul EmeryPartnerOffice:+44 (0)20 7213 3071Email: [email protected]

Tom EwinsPartnerOffice: +44 (0)20 7212 2243Email: [email protected]

Paula LetoreyDirectorOffice: +44 (0)113 289 4799Email: [email protected]

Helen WhitfieldSenior ManagerOffice: +44 (0)20 7804 2752Email: [email protected]

Mallinath KiniManagerOffice: +44 (0)20 7212 3384Email: [email protected]


PwC

Wrap Up

Robert Walker


This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should notact upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express orimplied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law,PricewaterhouseCoopers LLP, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for anyconsequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decisionbased on it.

© 2016 PricewaterhouseCoopers LLP. All rights reserved. In this document, "PwC" refers to the UK member firm, and may sometimes refer to thePwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details.

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