The UK is losing its tax competitiveness edge, and political parties should address this in order to keep the property market attractive to investors.
The United Kingdom lags behind many of its international rivals when it comes to corporation tax competitiveness, and it has fallen rather rapidly down the list of corporation tax-friendly countries in the past two years.
Despite this, the UK property market remains buoyant, and is widely recognised as one of the most attractive for investment anywhere in the world, thanks in large part to the fact that it is mature, well-regulated, transparent and relatively stable. And there are significant opportunities for investment, notably in the residential sector, grade-A office space, data centres and life sciences.
The UK cannot rest on its laurels, though, and to ensure it remains competitive the incoming government – of whatever colour – must take action to ensure the property market retains its attractiveness to investors over the long term.
How the UK compares
The UK was one of six OECD countries to increase its main corporation tax rate from 1 April 2023, to 25% from 19%. Research by the OECD has shown that high corporate taxation has the most significant negative impact on economic growth, while property taxes have the smallest impact.
The Washington DC-based, non-partisan, not-for-profit tax advisory group Tax Foundation publishes an International Tax Competitiveness Index, which ranks the tax systems of 38 OECD countries by competitiveness and neutrality. The 2023 index examined the changes that many countries made to recoup shortfalls in tax collected during the worst of the Covid-19 pandemic.
The UK ranked 28th most competitive for corporate taxes, down from 10th in 2022, and 35th for property taxes.
Typically, the tax benefit of capital investment is spread over several years, and the index compares the capital allowance regimes of countries for three major asset types: machinery, buildings and intangibles.
A major factor that is likely to have contributed to the UK’s steep fall down the ladder is the phasing out of the super-deduction, aimed at rebooting investment in assets. The super-deduction, in place from 1 April 2021 to 31 March 2023, enabled companies investing in certain qualifying new plant and machinery assets to claim a 130% capital allowance, giving them a tax cut of up to 25% on every £1 invested. Qualifying assets included items such as solar panels, offices desks and chairs, EV charging points and foundry equipment.
Full expensing, whereby companies can claim a 100% tax deduction on capital expenditure in the year it was incurred, replaced the super-deduction but was announced as a temporary measure. If it was made permanent, the UK would see its tax competitiveness improve.
Property taxes affect investment decisions too
Since 2017, a series of new rules have meant that even when overseas investors use corporate structures, they may find themselves liable for significant tax costs on property investments in the UK.
Among other measures, non-resident companies are now subject to UK corporation tax on profits from the sale of UK real estate. They are also subject to UK corporation tax for annual profits earned from property businesses. Additionally, investors who hold shares in companies that derive value from UK real estate can be subject to UK capital gains tax on the sale of those shares. The rule changes also mean that an individual’s estate is exposed to inheritance tax on the value of shares in companies that derive value from UK residential property.
Although corporation taxes are considered to be the biggest tax disincentive for investors in property, the impact of property taxes on investment decisions cannot be ignored.
Among OECD countries, seven have property tax collections in excess of 1% of private capital stock. The UK heads this list with property tax collections of 1.8% of private capital stock.
In the UK, stamp duty land tax, as well as various annual levies such as business taxes, may place a brake on investment. SDLT of up to 17% on residential properties held in a non-UK corporate structure is a potential issue when looking at investment returns.
The UK has established “investment zones” with the intention of making inward investment attractive, including support for infrastructure, enhanced capital allowances and general rate incentives. These need to be promoted more robustly.
Opportunity ahead
Despite its comparative lack of tax competitiveness, the UK property market remains attractive to investors looking to exploit the many opportunities.
In student housing, research from Savills shows that 234,000 extra beds are needed to reach a ratio of 1.5 full-time students per bed. A steady return of workers to offices is also an encouraging sign, with clear opportunities for investment in grade-A offices. An uptick in interest in mixed-use projects and the need for green and sustainable buildings also represent opportunities for investors.
As we look ahead to the election, the main political parties have made various tax pledges. The Conservatives have said they will permanently adopt full expensing, if re-elected, for example. Labour has said, if elected, it will cap corporation tax at its current rate of 25% – the lowest of the G7 countries – for the duration of the next parliament.
At the Labour Party’s annual conference last October, leader Sir Keir Starmer said that if Labour is elected it will build 1.5m new homes and begin a project of new towns that will include at least 40% affordable houses. The Conservatives have also put housebuilding front and centre of their manifesto pledges, primarily recognising the need to reform the planning system.
Whichever party is elected should ensure that there is clarity on the tax implications and opportunities for investment in property in the UK. And, as with any new government, the first 100 days after the election should shine a light on the extent to which the investment landscape, including tax changes, is being used to boost the attractiveness of UK property.
Atul Kariya is head of construction and real estate and Glen Thomas is a tax partner at MHA
