An £8 billion property tax loophole no government wants to close

The subject of foreign investment in UK commercial real estate will likely rear its head as we approach the next budget. We know that a large percentage of UK commercial property is owned by overseas individuals/companies, and many residential properties in London, who enjoy an array of tax breaks. Many will argue that without these tax breaks foreign investment in the UK commercial property market would reduce and market liquidity would be impacted. However, perhaps it is time to review the treatment of overseas investors in UK commercial property and the tax benefits they have enjoyed for some time?

Non-UK companies and commercial property

When the then Chancellor George Osborne took action against non-domicile status and the tax benefits, there was much cheering and backslapping. He changed the rules on the permanent non-domicile status as well as inheritance tax and capital gains. However, in what many believe was an open goal and a major mistake he did not tackle commercial properties.

As a consequence, overseas individuals and companies investing in the UK simply acquired residential property within companies therefore reclassifying it as commercial. While the tax breaks formally enjoyed by individuals were removed the status quo remained for overseas companies. So, in a swift transfer from personal to company assets the tax loophole was blown wide open again.

How much tax is the government losing?

It is difficult to say with any real confidence how much the government could raise by closing the tax loophole but estimates range from between £5 billion and £8 billion per annum. When you bear in mind that property taxes currently raise around £12 billion a year for the UK Treasury this would be a significant increase if the tax loophole was closed.

If we put this in perspective, there is around £870 billion worth of commercial real estate property in the UK which equates to around 10% of the nation’s net wealth. In any one year about 20% of commercial property will change hands, worth in the region of £115 billion according to government figures for 2015. The use of tax havens, offshore companies and “clever tax planning” has for many high net worth individuals reduced or eliminated any potential tax implications on their commercial property transactions. So, is the UK alone in offering these tax breaks?

Why does the UK stand alone?

As the current tax system stands there is a real disadvantage for those companies and individuals resident in the UK. Governments in the US, Spain, France, Germany, Italy, Canada and Australia tax the capital gains of foreign investors but the UK has for some time acted very differently. Slowly but surely the net is closing in on those who look to avoid tax by illegal means but with a swift signing of a document surely the UK government could save all of the hard work?

It would be easy to cast aspersions on the Conservative government but Labour have been in power in recent times and also failed to address this issue. There have been sticking plasters and hot air but the reality is that overseas companies and overseas investors can still legally avoid an array of UK property related taxes starving the UK Treasury of up to £8 billion a year. Will Philip Hammond finally bite the bullet and do what needs to be done?

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