As non-UK resident landlords are set to be taxed on UK property gains from April 2019, there has never been a more important time for solicitors to highlight to their property investor clients the significance of ensuring capital allowances are not overlooked within commercial property transactions. Shaun Marsden explains

On 1 April 2014, the Capital Allowances Act 2001 came into force, introducing mandatory pooling requirements and a 24-month deadline in which to complete a formal election between buyer and seller. Mark Tighe examined the changes in Property in Practice magazine.

Four years on, there is now a much larger issue for non-resident landlords (NRLs) (ie foreign investors) to be aware of: the removal of the capital gains exemption. 

As of 1 April 2019, NRLs will no longer be exempt from capital gains tax (CGT) on UK commercial property. Property Week reports that there are some 38,000 reported commercial properties held by NRLs within the M25 alone. HM Revenue & Customs (HMRC) is currently tightening its grip on all areas of taxation, and there are significant changes afoot. 

The use of interest as a cost to an NRL is also being capped. There are many property vehicles operating offshore which use interest on borrowing from international funds to wipe out profitability derived from the rental income of their UK assets. HMRC has introduced a cap of £2m, or 30 per cent of earnings before interest, taxes, depreciation and amortisation, for a property special purpose vehicle. This cap is going to mean that NRLs will be subject to corporation tax.

Our experience shows that a large proportion of commercial properties held in offshore vehicles have never undergone a retrospective capital allowances assessment, because up until now, very few property vehicles have experienced NRL tax exposure or, indeed, any CGT liabilities.

In addition to these two new areas of tax exposure, there is also the impact of potential tangible losses for a foreign investor who may have been poorly advised on how to treat any potentially available unused capital allowances locked within a transaction that took place within the last 24 months and one day. They can no longer claim capital allowances, as the 24-month window has now closed, and many are now the bearers of significant tangible losses as a result of poor advice.

If any of your clients have acquired or disposed of a property within the last 24 months, it is worth them taking specialist advice. Similarly, for any NRLs who held a property before 1 April 2014, there may be an opportunity to identify and claim unused capital allowances. 

You should also advise all NRL clients to carry out a revaluation of their commercial property(s) on or close to April 2019, to indemnify the base cost of their property (as of April 2019) to support future disposal CGT calculations. Most clients will also experience some immediate benefit from a retrospective appraisal.

Catax can deliver a revaluation and capital allowances valuation at the same time. Subject to allowances being identified, the revaluation can be free of charge. 

Shaun Marsden is associate director at Catax , the Law Society’s endorsed capital allowances partner.