Although making predictions is fraught with danger at the best of times - let alone during a global pandemic – here are three property-related tax announcements we would not be surprised to hear on 3 March.
1. Extension of the SDLT holiday (even if only for a short time)?
The SDLT holiday, which involved raising the zero-rate threshold for residential purchases from £125k to £500k, is due to expire on 31 March 2021. Many transactions that have been agreed (and priced) on this basis will not complete before this date and so are at risk of falling over.
Although the government has previously indicated that it is not minded to extend the holiday (seemingly on the basis that the policy has achieved its objective of providing a short-term stimulus to the housing market, but also presumably on revenue-raising grounds), the backlog of transactions trying to meet this deadline has been widely publicised and there have been calls from many quarters for an extension to be granted to prevent transactions collapsing. A petition to extend the holiday by six months has - at the time of writing - garnered over 150,000 signatures and press reports of an extension abound (see, for example, "Stamp duty holiday will be extended to the end of June", The Times, 24 February 2021).
We consider an extension of some description to be likely since it would seem to fly in the face of reason to successfully buoy the residential property market only to let it fall off a cliff in the midst of the continuing Covid-19 restrictions. The question is, how long should the extension be?
Many have called for six months, although this may be considered too expensive. An extension of a matter of weeks would be better than nothing if it facilitated the completion of the majority of the backed-up transactions. Perhaps the most likely candidate, though, is an extension of three months to the end of June – that is the timeframe reported by The Times as having been alighted on by Rishi Sunak (see article reference above). Although not long enough to satisfy everyone, this would seem a reasonable outcome. Doubtless, if a three month extension is announced, the Chancellor will make clear that this represents a 'hard stop' to head off calls for a further extension.
2. ESG-related property tax measures?
One of the Chancellor's priorities on 3 March will presumably be stimulating economic activity, thereby boosting the UK's recovery from the Covid-19 induced recession. It is also seems likely that the government will be keen to show its 'green' credentials, particularly with the COP 26 summit being hosted in Glasgow this year. And a near-perennial government focus is to increase the rate and quality of housebuilding.
Putting these things together, it would therefore not be greatly surprising if Rishi Sunak looked to announce some form of tax incentive for improving environmental standards in residential buildings.
What sort of measures might he consider? The VAT system is the obvious place to look, since landlords of residential property (including 'build-to-rent' investors) currently suffer material irrecoverable VAT on repairs, maintenance and improvements which hit returns and ultimately may disincentivise them from incurring expenditure on improving dwellings. One possibility might be to introduce reduced- or zero-rating for expenditure on environmentally-friendly repairs and improvements of residential buildings. Another might be to expand the scope of reduced rating for the installation of energy-saving equipment.
The capital allowances system might also be used to incentivise this sort of expenditure. But perhaps another reason to focus on the VAT system is Brexit. Before 1 January, EU law might well have prevented the Chancellor introducing VAT changes of this sort – indeed, only in 2019, the UK was forced to restrict the scope of its reduced-rating regime for energy-saving equipment because it was held to be incompatible with EU law – and so this might be seen by the government as a chance to demonstrate what can be done with the UK's greater flexibility in this area.
3. Corporation tax rise?
The astronomical cost of the relieving measures implemented by the government in response to the Covid-19 crisis, together with the further expense involved in potential 'give-aways' to boost economic growth, means that the Chancellor will no doubt be looking for ways to raise material revenue over the next few years.
As a result of the Conservatives' manifesto pledge not to raise rates of income tax, national insurance contributions and VAT (the so-called "triple tax lock"), Rishi Sunak's room for manoeuvre is rather limited (although he could of course freeze thresholds and limit reliefs). Capital gains tax reform has been the subject of much speculation over the last six to nine months, but another tax which Mr Sunak is free to increase is corporation tax. It has been reported that he is planning to increase rates incrementally over this parliament, and if he looks to maintain the UK's CT rate as the lowest in the G7, this might be seen as a way to raise revenue without damaging the UK's competitiveness and risking choking off the recovery.
This would obviously be bad news for UK corporate landlords and developers alike. But it would be equally unwelcome for non-resident corporate landlords, which as of April 2020 are subject to UK corporation tax on their rental income (rather than the basic rate of income tax). One of the main drivers for this change was to ensure that these entities are subject to various interest deductibility restrictions, including the corporate interest restriction and anti-hybrid rules, which do not apply to income tax payers. The fact that the headline rate of corporation tax (19%) is currently marginally lower than the basic income tax rate (20%) was seen as a silver lining – is that about to change?
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