Real Estate Markets In The USA And UK Affected By Major Tax Changes

For clients invested in these markets or thinking about being so you need to be aware of some fundamental tax changes which may impact these markets and most importantly will impact your after tax returns.

At the time of this alert, the United States GOP tax bill has been approved by both the United States Congress and Senate and was signed by President Trump on 22nd December. The UK government announced in its budget in November 17, significant future changes to the taxation of commercial real estate owned by non UK resident persons.

The US tax changes mean the US has chosen to put itself on more of a level playing field in relation to tax when compared with other sophisticated and liquid real estate markets. This comes about because of the reduction in the federal tax rates applicable to corporations and pass-through entities. The US federal corporate income tax rate has been reduced to a flat 21% from rates graduated to 35%. The US federal income tax rate on income earned through pass-through entities now benefits from a 20% deduction, There are of course other changes relating to the deductibility of expenses which will affect the way property investments will be made and affect residential and real estate differently. There will still be exposure to estate tax to US real estate investments made by individuals but for non US individuals it will be possible to put in place structures to mitigate or eliminate that exposure.

The UK is choosing a different path but one which aligns its tax rules relating to the ownership of UK commercial real estate to those of other major economies. The legislation, which has been outlined in a consultative document issued by the UK government after the UK budget in 2017, and which contemplates the legislation being affective in April 2019 would subject investment gains on commercial real estate owned by non UK residents to tax rates of 28% for individuals and 19% for companies and widely held funds. The rules will also apply to interests in entities which are "property rich". This marks a fundamental shift where investment gains on UK commercial property realised by non UK residents are currently...