04 April 2011
The recent Budget held a number of tax changes for the property sector. Looking at the details, Jonathan Legg finds that on balance it was positive
From a property tax perspective there were no bombshells in the Budget, but there were a few surprises in store for the property sector, both good and bad.
In terms of what was not mentioned, it is good news that the chancellor of the exchequer did not follow up on last year’s cryptic comments about taxing the sale of shares in companies or units in unit trusts at a higher rate of stamp duty land tax (SDLT). Draconian rules affecting such transactions would have impacted severely on many property-holding structures. It is hoped that any future changes will be based on proper consultation.
A decrease in the main rate of corporation tax (applying to businesses with profits in excess of £1.5m) from 28 per cent to 26 per cent with effect from 1 April is a welcome boost to business. The rate will then fall by 1 per cent per year until it reaches 23 per cent on 1 April 2014. As announced in last year’s June Budget, the rate of corporation tax for smaller companies (where profits are below £300,000) will also be reduced, from 21 per cent to 20 per cent, with effect from 1 April.
HM Revenue & Customs (HMRC) has listened to the property sector’s representations to reduce the rate of SDLT arising on bulk purchases of residential property. Under the new rules the rate of tax on a bulk purchase will be determined by the mean rather than the aggregate consideration. This is calculated by dividing the aggregate consideration by the number of residential properties. So if the mean consideration was less than £250,000, the SDLT arising would be 1 per cent, even if the total consideration was £100m.
This is intended to kick-start the residential sector, particularly in the context of getting institutions to invest in the private rented sector, and is to be welcomed.
The announcement with regard to real estate investment trusts (Reits) is particularly welcome. HMRC is launching an informal consultation about how to encourage new entrants and simplify the existing regime. It is significant that HMRC is considering removing the 2 per cent entry charge. This would make the Reit model much more attractive and certainly make the case for setting up offshore, which has been the alternative for many property investment companies and funds, considerably weaker.
It is also hoped that the regime is tweaked to ensure that the Reit model fits the realities of residential investment, with its need to constantly churn properties.
Predictably, the Budget clamped down on a specific avoidance scheme that utilised the so-called ’alternative finance’ reliefs to avoid SDLT. These structures involved sale-and-leaseback structures, often combined with ’sub-sale’ relief.
The new rules broadly take effect from 24 March unless arrangements were entered into before that date. The clamping down on this kind of arrangement means that the days of packaged SDLT schemes are numbered. However, HMRC will continue to argue that such arrangements did not work in any event and will not doubt litigate where appropriate.
There were also some more technical changes. Amendments to the SDLT exchange rules will affect certain transactions. Following HMRC guidance, the accepted practice has been that SDLT does not have to be accounted for on the VAT element of certain types of transactions, such as sale-and-leaseback.
A person buying a property for £100,000 plus VAT of £20,000 who granted a leaseback to the vendor would only account for SDLT on the VAT-exclusive amount of £100,000, even though VAT was paid. The new rule, with effect from 24 March, appears to reverse this treatment, meaning that SDLT will arise on the VAT-inclusive amount actually paid (£120 in the example above).
Other developments include enhanced capital allowances possibly being made available on investments in designated enterprise zones. Meanwhile, the review of SDLT first-time buyer relief will be announced in the autumn. Further details are eagerly awaited.
Finally, do not forget the new top rate of 5 per cent for residential property announced in last year’s Budget. This will take effect from 6 April.
Overall, this was a decent Budget for the property sector. Certainly the Government seems to have listened to representations from industry bodies.
Jonathan Legg is a tax partner in the real estate group at Mishcon de Reya