Budget 2016: Property briefing

This article was produced by Nabarro LLP, which joined CMS on 1 May 2017.

Summary and implications

In three surprise moves, George Osborne has announced: a major reform to stamp duty land tax (SDLT) on commercial transactions; that there will be no institutional investor relief from higher rates of residential SDLT; and big changes to offshore developers of UK land.

SDLT changes targets commercial property

The Chancellor has announced a major reform to SDLT on commercial transactions, taking it from a 'slab' to a 'slice' system and changing the rates.

New rates

The new rates are as follows:

Each new SDLT rate will only be payable on the portion of the property value which falls within each band (rather than tax being due at one rate on the entire property value).

Market impact

The tipping point under the new system is £1.05m. Purchasers of commercial property over £1.05m will pay more SDLT than under the existing system. For valuable commercial properties, the changes effectively amount to a one per cent increase in the rate. This could have the effect of exacerbating the use of offshore holding structures.

Leasehold transactions

For leasehold transactions there will also be a new two per cent rate for rent paid under a non-residential lease where the net present value (NPV) of the rent is over £5m:

Timing

The changes affect purchases or leases that are completed on or after 17 March 2016. There are transitional rules so that contracts that are exchanged before midnight tonight (16 March 2016) but are not completed until on or after 17 March 2016 can choose whether to use the old or new rules (provided there are no events such as the variation or assignment of the contract before completion).

No institutional investor SDLT relief for additional residential properties

There will be no relief from higher rates of residential SDLT available for institutional investors.

The government announced at the Autumn Statement 2015 that higher rates of SDLT will apply to acquisitions of residential property on or after 1 April 2016 where at the end of the day of the acquisition, an individual purchaser owns more than one property. Relief is available where the purchaser is replacing their main residence. The higher rates will apply to non-individual purchasers purchasing any residential property, not just additional properties.

New rates

The higher rates will be a three per cent increase on the current SDLT rates, representing a significant added cost for acquisitions of additional residential properties

The consultation

In consultation, the government confirmed it was considering an exemption from the higher rates for those making "significant investments" in residential property, given the importance such investors play in supporting the government's housing agenda. The government gave the example of the acquisition of a bulk purchase of at least 15 properties as potentially qualifying for exemption from the higher rates. In response to this, the industry (and in particular the British Property Federation), lobbied for a relief for institutional investors. Contrary to expectation, the government announced in today's Budget that no such relief will be available.

Multiple dwellings relief

The additional rates will also apply where claims for Multiple Dwellings Relief (MDR) are available (i.e. relief from SDLT that can entitle a taxpayer acquiring more than one residential property to pay SDLT at rates calculated on the average consideration payable for each property). Purchasers of six or more residential property can treat the acquisition as commercial such that the commercial rates of SDLT would apply to the transaction. Due to the increase in rates for SDLT in respect of commercial property acquisitions, purchasers will need to establish whether they are better off treating the acquisition as commercial or making a claim for MDR.

Impact

The higher rates of SDLT in respect of additional residential properties follows a raft of measures introduced by the government that increase the taxation of residential property (including higher rates of SDLT for acquisitions by non-natural persons, the annual tax on enveloped dwellings and non-resident capital gains tax). Whilst the government recognised the importance of providing relief from those measures for institutional investors, it has chosen not to follow the same approach here. It remains to be seen whether this change will significantly impact the UK residential market. If it does so, the government may have inadvertently exacerbated the housing crisis they are trying to ease.

Big changes to offshore developers of UK land

The Government announced measures in today's Budget designed to ensure that offshore developers of UK land are taxed in the same way as a UK developer. The key change removes the current territorial scope of the UK legislation so that the profits of a trade of dealing in UK land or developing UK land with a view to disposing of it will be subject to UK tax regardless of:

• the residence of the entity carrying on the trade;

• where the trade is carried on; or

• whether the trade is carried on through a permanent establishment in the UK.

What is affected?

Genuine property investment carried on by offshore entities should be unaffected by these changes. However, where there is any trading activity in respect of UK land or property, the full profits realised will be subject to UK tax. Arguments as to the attribution of profits to a UK permanent establishment will no longer apply. This makes the distinction between property investment and property trading activities even more critical. On a positive note, the application of the Diverted Profits Tax rules (and its penal 25 per cent rate) to property structures now seems redundant.

The changes will apply to disposals of UK land that occur on or after the date the legislation is introduced in Parliament at Report Stage, expected to be June 2016. Anti-avoidance rules will apply with effect from today to prevent any arrangements put in place between now and when the legislation is in force designed to get around the charge. Specifically, the anti-avoidance rules make clear that any attempt to transfer UK land or property to a related party in an effort to increase its base cost and therefore reduce the subsequent profit that will be caught by the new rules will be captured.

The announcement states that the legislation will contain provisions preventing groups from fragmenting profits from the development by paying large development fees to connected offshore companies in the hope of reducing the profits subject to tax in the property owning vehicle. Measures will also be included to prevent circumvention of the rules by 'enveloping' UK land and selling the property owning vehicle rather than the land itself. These changes are likely to be implemented through amends to the existing "transactions in land" anti-avoidance provisions in Part 18 of the Corporation Tax Act 2010.

The Government has recognised that in order for the legislation to be effective, certain changes need to be made to the UK's Double Tax Agreements with Jersey, Guernsey and the Isle of Man. Amending protocols for those treaties have been negotiated which take effect from today.

HMRC have invited comments on the technical note published today. Responses must be received no later than 29 April 2016.

Impact

The changes will have a huge impact on existing offshore property development structures, cutting across the tax analysis and modelling carried out when development activities commenced. We would encourage anyone who has concerns that this announcement could impact on their current or proposed arrangements to contact us for further advice.