Alongside sustainability and our evolving consumer habits, the way in which real estate assets are held has become more prominent in real estate discourse as we begin a new decade. Executive Director Nick Terry turns his attention to how a number of taxation changes are influencing these changes.
Sustainability issues within the real estate sector have risen to the top of conference agendas in 2020, and rightly so. According to UN estimates, real estate accounts for about 40 per cent of the world's energy consumption and a third of all carbon emissions - the latter a figure that the World Bank says must be reduced by 36% by 2030 to support staying within the global 2°C of warming target threshold. Pressure is therefore intensifying on real estate firms to facilitate the creation of sustainable workspaces, buildings and communities - changes which will affect the entire real estate value chain.
The way real estate is being utilised globally is also evolving. Consumers are spending more of their money online, resulting in well-publicised issues for high street retailers unable to adjust to the change. Indeed, I have even heard arguments asserting that retailer's shop rents should come from marketing budgets rather than operational costs! Add to this the growth in co-living and co-working spaces and the trend of redundant office and retail spaces being converted to residential units and you can see a rapidly changing landscape. Far less visible are the changes to how real estate assets are being held.
There have been some major changes to the European real estate taxation frameworks over the last couple of years. Germany is introducing amendments to their Real Estate Transfer Tax (RETT) laws, Poland has overhauled its international payments and withholding tax legislation and the UK has introduced Capital Gains Tax (CGT) for non-UK resident owners of UK assets.
The UK has also moved to align the Non-Resident Landlord Scheme with its Corporation Tax framework and arguably the most significant developments are the interest restrictions under this framework. It will limit the amount of interest that can be offset across a corporate group to the lower of £2m or 30% of EBITDA*. This change could adversely impact real estate investors who are often reliant on third-party debt in order to finance acquisitions. As a result, they may incur significant interest charges which would no longer be able to be offset against income received (more detail can be seen on HMRC's website here).
Furthermore, the changes to the rules on CGT and the 'levelling of the playing field' between UK resident and UK non-resident owners of UK real estate is giving the financial real estate advisory industry even more to think about. Careful consideration needs to be given to issues such as who are the investors, whether they may be considered as exempt investors (e.g. pension funds) and whether your structure can, or should, make either a transparency or exemption election (and indeed what the ramifications of that election may be in terms of reporting obligations and future flexibility of the structure).
As the new UK rules start to bite, the industry is generally seeing more UK real estate assets being acquired using UK domiciled entities, combined with an increased interest in the UK REIT regime (including the use of The International Stock Exchange (TISE) as a listing platform) and also non-UK entities which are managed, controlled and taxed in the UK. This UK managed and controlled approach is an interesting one as it potentially enables a company to take advantage of the flexibility of their chosen jurisdiction's corporate law (for example regarding distribution), while not incurring the costs of running the structure in a non-UK jurisdiction.
We are also seeing an increased number of multi-jurisdictional structures where the feeder vehicles, collective investment vehicle, holding companies and property companies can all be in separate locations with differing characteristics. Again, Ocorian have invested heavily to ensure that we can provide our clients with a genuinely seamless service across multiple locations, overseen by a single relationship team and core points of contact.
As for what lies ahead, Ocorian has seen sentiment improve with a noted increase in prospective investment activity. The feeling among many of our clients is that having some stability in the UK's political landscape (irrespective of one's personal views) is undoubtedly good news for investment planning. There's a hope that the major taxation changes are now known and can be planned for, even if they remain yet to be fully implemented.
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