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Budget 2020: real estate tax response

David Farr David Farr

The UK government budget for 2020 was mainly focused on minimising the economic damage from the ongoing coronavirus outbreak, but among the panic there was good news.

This was especially true for the real estate tax industry, our Head of Real Estate, Kersten Muller, explains in the video below:

 

Supporting what Kersten summarised, Director David Farr details the budget points that affect you:

Rishi Sunak has unveiled his first spring budget and, perhaps as expected on the day that the Bank of England reduced interest rates to 0.25%, the government’s response to coronavirus took centre stage. As expected, there was a clear focus on strengthening and boosting the UK’s infrastructure, transport and housing supply.

We welcome the government’s commitment to “level up” the UK and it is encouraging to see that the government aims to invest more than £600 billion – the highest level of public net investment in real terms since 1955. A “landmark” national infrastructure strategy was also announced, which will set out a “once in a generation transformation of the UK’s economic infrastructure”, together with various specific measures aimed at improving the country’s infrastructure. 

In connection with such investment, there were some specific tax measures announced, which we have outlined below. We look forward to reviewing the detail on these measures.

New UK funds regime consultation

While it didn’t make the speech, the government published a consultation on the UK funds regime to consider tax and relevant areas of regulation to ensure ongoing competitiveness and sustainability. As a first step, there will be a review of the VAT charged on management fees, together with a review of the attractiveness of the UK as a location to pool investment and hold fund assets. In particular, the government is keen to understand the barriers the UK tax system might pose for the establishment of such funds in the UK, the merits of taking steps to remove those barriers and the different options that might exist for doing so.

The government clearly recognises the benefit of bringing capital flows and fund-management infrastructure to the UK. The review will look at how the UK competes with overseas jurisdictions with regard to the taxation of rents within property holding vehicles, withholding taxes on interest and distributions, and share disposal exemptions. In particular, the review will look at the following:

  • Potential broadening of the existing qualifying institutional investor qualification for substantial shareholdings exemption or the creation of a more-comprehensive exemption for gains (although this is unlikely in connection with UK property-rich entities, which have recently come into the UK tax net from April 2019)
  • Expansion of the existing REIT regime to a wider class of UK property-holding companies
  • Potential reduction of the administrative burden on making treaty claims in respect of withholding taxes
  • Review of the hybrid mismatch rules to identify any unintended and disproportionate impact on the funds sector

It remains to be seen whether the government will seek to introduce a further UK-regulated vehicle to achieve these aims or seek to ring-fence qualifying funds from certain aspects of existing UK domestic tax legislation. Nevertheless, this consultation is a welcome development and we look forward to discussing these points with both Treasury and clients.

Increase in the structures and buildings allowance from 2 to 3%

As expected, the government announced an increase in the rate for the Structure and Buildings Allowances (SBA) from 2% to 3% from 1 April 2020. This will accelerate tax relief for construction spend on items that do not qualify for normal plant and machinery and integral features allowances. It is important to note that any relief claimed is subsequently clawed back against the base cost of the property on sale. It remains as important as ever to undertake a capital allowances review to justify the claim for SBAs and to preserve the ability to make such claims.

New enterprise zones?

Interestingly, there was a mention of designated enterprise zones, with the ability to claim 100% capital allowances, until at least 2021. This suggests that the government may be planning to designate additional enterprise zones in certain key areas as part of their plan to “level up” the UK.

Research and development

The increase in research and development (R&D) expenditure credit from 12% to 13% is a welcome boost for innovation in the construction industry and will assist with the development of alternative safety materials, test procedures and construction techniques, eg, modular house building. We have a dedicated team of R&D tax specialists with engineering and technology backgrounds who can help identify where claims may be available, prepare and review claims and assist dialogue with HMRC on such matters.

2% SDLT surcharge for non-residents acquiring residential property

The much-trailed surcharge on residential purchases by overseas investors was also announced. This will be at 2% from April 2021, down from the 3% previously suggested. Interestingly there have not been any further details released on how the surcharge will operate. Questions therefore remain on the level of complexity that the additional surcharge will introduce following the original proposals set out in the previous consultation document and what impact it will have on the UK housing market.

Business rates reform

The announcement of a review of the business rates regime was widely expected.

In particular, the review will look to reduce the overall burden on businesses and improve the current business rates system going forward.

The review will focus on four main areas:

Improvements to the scheme that could be put in place from April 2021, alongside the forthcoming re-valuation, including the Transition Relief Scheme (a relief in place to limit how much a business’ bill can fluctuate each year as a result of property re-valuation)

Changes to the current business rates system to establish a long-term sustainable regime, including looking at the basis on which market values are determined, how often the rate should be determined, the effectiveness of different reliefs and who is responsible for paying the tax

The administration of the business rates regime, covering the valuation and appeals process, billing and compliance with any tax due

Exploring the potential alternatives to business rates, in particular looking at the taxation of land and property

It has been confirmed that the review will have a particular focus on the role of business rates in the funding of local government and services, as well as understanding how changes to the system will be implemented and the implications of any changes going forward, including any practical challenges that could arise as a result of the changes. The review will not consider the overall level of funding for local government, but will publish a call for evidence in spring 2020 and report by autumn.

We are very much in support of a fundamental review into the future of business rates and believe that this should have a clear focus on the way businesses use property in the 21st century.

Get in touch if you would like to discuss any these issues further.

BUDGET RESPONSE
Budget 2020: preparing for coronavirus and investing in infrastructure Read our analysis
Report Unleashing counties’ role in levelling up England Find out more
Technical Tax changes for non-resident investors in UK property Find out more

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