Budget 2021: Real estate tax measures
Despite the lack of any unexpected headline grabbers, the Budget today contained various announcements, with practical importance for the real estate sector, offering a mixed bag of potential reliefs, opportunities and future increased tax costs, but succeeding, at least, in itself, of offering some more potential certainty as to the tax landscape for the next few years.
We have not yet had the detail of many of the announcements - much of which will be in the Finance Bill to be published next week, and we will update our thoughts then.
For landlords and tenants, the continued and extended Covid support and other measures aimed at getting businesses back on their feet, as well as the extended business rates holiday and new discount will be good news in their ongoing arrangements, particularly around sustainability and rent.
There were lots of potential opportunities across the country – most already announced, which, now we are now seeing more detail, will be scrutinised with interest, in particular - around the new Freeports (see below) and other measures around regeneration. We expect to see some interesting joint ventures here as people seek out new opportunities.
For the housing sector, the reaction will be mixed. Good news for the housebuilders, with: (1) the new mortgage guarantee scheme, which should help plug the gap between first-time buyer demand for properties and available mortgage finance for those with low deposits; and (2) the extension of temporary SDLT relieving measures (see below), but less comfort elsewhere with confirmation that the new 2% surcharge for purchases of residential dwellings by non-residents (very widely and particularly defined) will still be coming in as expected on 1 April (and will therefore cut across any SDLT saving otherwise realised by a non-UK investor taking advantage of the SDLT relieving measures). The surcharge will add 2% to each relevant residential rate band (or the higher rate bands, where they apply).
On an individual level, there will no doubt be relief in various quarters at the relatively light touch on tax on capital gains and inheritance tax, despite the various reviews throughout the year, with the capital gains annual exempt amount (£12,300) and the existing inheritance tax thresholds (the nil-rate band of £325,000, the residence nil-rate band of £175,000 and the residence nil-rate band taper starting at £2 million) remaining frozen until April 2026.
Please see our separate briefing for more information on the impact of the budget for the asset management sector.
The key point, of course, will be the announcement on corporation tax – rising to 25% for larger companies from April 2023. This will impact on returns from that date, and will, no doubt, increase interest in alternative holding structures such as REITs and the proposition for the new UK asset holding company, when it comes to offshore investments. Helpfully here, from next year we are expecting to see some measures further facilitating the use of the UK REIT regime. While it was also announced that there would be an extended 3 year carry back of trading losses for accounting periods ending in the period April 2020 to 31 March 2022, notably, which we note is a potentially helpful extension of trading loss carry back rules, these only seem to apply to trading losses, not to losses generally.
As such while very useful to those with trading losses, and, in particular, potentially to some tenants, they will not be as widely useful as may have been hoped for by those with letting businesses. The new corporation tax rate is likely to be particularly unwelcome for non-resident landlords, which as of April 2020 are subject to corporation tax (rather than the previous basic rate of tax on income of 20%), bringing them also within the 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 was lower than the basic income tax rate (20%) was seen as a (small) silver lining. We also note that the diverted profits tax will be increased to 31% from April 2023 (which when initially introduced was a concern for some in the sector). However, in practical terms, the applicability of this tax has largely been superseded by the Transactions in UK Land rules, so it is unlikely to be a real concern.
However, at the same time, the availability of reliefs can mean that, whilst the headline tax rate may be increasing, for some the effective tax rate may not be. Reliefs (such as capital allowances and R&D reliefs) decrease the amount of a company's profits subject to corporation tax, reducing the effective tax rate. The government has introduced a new 'super deduction' capital allowance and 50% first-year allowance for qualifying special rate assets (please see below for more information) plus reliefs for those in freeports.
From 1 April 2021 until 31 March 2023, companies investing in new qualifying plant and machinery assets qualifying for main rate (18%) writing down allowances (generally not available for expenditure on dwellings) will benefit from a new first-year 130% capital allowance (a so-called 'super deduction' allowance, as the allowance is in excess of the cost of the asset). Whether the requirement for the plant and machinery to be 'new' denies the availability of the enhanced allowance for expenditure incurred on fixtures when a property is acquired is not yet clear from the draft legislation. There will also be a 50% first-year allowance also available for qualifying special rate (including long life) assets. Importantly, the enhanced relief will not be available in relation to contracts entered into prior to 3 March 2021, even if the expenditure is incurred after 1 April 2021, which will certainly be a disappointment some. Otherwise, this should be a valuable relief for landlords and tenants.
As anticipated, the government has announced a series of tax incentives the new freeports regime:
- An enhanced 10% Structures and Buildings Allowance (generally not available for expenditure on dwellings) for constructing or renovating non-residential structures and buildings within Freeport sites. To qualify, the structure or building must be brought into use on or before 30 September 2026. This allowance will reduce the time it will take to relive the qualifying expenditure from 33 1/3 years to 10 years.
- Enhanced capital allowances of 100% for companies investing in plant and machinery for use in Freeport sites (applying to both main and special rate assets). This relief will remain available until 30 September 2026. Clawback provisions will apply to the extent such plant and machinery is no longer used within the Freeport area. We await the final detail in the draft Finance Bill to see how these enhanced capital allowances will align with the more generous 'super deduction' capital allowances.
- Full SDLT relief on the purchase of land or property within Freeport sites. The relief will remain available until 30 September 2026 and it is expected that clawback provisions will apply to the extent that the land ceases to be used in a 'qualifying manner' within a period of 3 years of the land being acquired. It is not clear whether the clawback provisions would apply to clawback the relief on a subsequent disposal (such as on a grant of a lease) (we will need to see the detail in the draft Finance Bill).
- Full Business Rates relief for all new businesses, and certain existing businesses where they expand, in Freeport sites until 30 September 2026 (relief will apply for five years from the point a which the business first receives relief).
- A proposed employer NIC relief, available for eligible employees at Freeport sites, which would be available until at least April 2026 with the intention to extend the relief for a further five years to April 2031.
- More detail is awaited on freeports generally, more particularly on how far the tax reliefs will extend, what kind of businesses they will apply to and on how they will work in practice.
Mortgage Guarantee Scheme
In some good news for first-time home buyers, the government will introduce a new mortgage guarantee scheme in April 2021, which will be available for new mortgages until 31 December 2022. The scheme will be available to borrowers holding just a 5% deposit, available on homes with a value of up to £600,000. Borrowers will have the opportunity to fix their initial mortgage rate for at least five years should they wish to. Mortgages are expected to be available from a range of high-street lenders. Again, the construction industry may benefit here.
Corporate interest relief and REITs
Already announced and to be incorporated into the Finance Bill with retrospective effect, will be a measure to ensure that the corporate interest restriction rules operate as expected for those REITs with non-UK resident companies with UK business that came into the corporation tax net last year, putting them on a level footing here with other REITs.
Repeal of UK rules incorporating the EU Interest and Royalty Directive
A fallout of Brexit, we had potentially expected this to happen, in particular, following discussions with HMRC on the asset holding company regime, so the announcement does not come as a total surprise. In practice, we would not expect it to be relevant to many companies as often shareholder debt is structured so as to be without withholding tax without relying on this measure (and this is borne out by the Budget statistics). However, it will be relevant to some with EU shareholder debt and they will need to consider other ways, for example, potential treaty relief, to ensure that they can receive interest without a 20% withholding.
Temporary SDLT nil rate band increase
The nil-rate SDLT band (SDLT is calculated on successive bands of the purchase price which are taxed at increasing rates) for residential properties will continue to temporarily be increased to £500,000 so that only the portion of the purchase price above that amount will be taxed until 30 June 2021 (please see our briefing here for a reminder of the rules).
For residential purchases within the 2% non-resident surcharge, from 1 April 2021, 2% will be added to each relevant band (whether for normal residential purposes or for residential purposes within the 3% surcharge).
To avoid a cliff-edge effect on the housing market following the end of the temporary relieving measures, from 1 July 2021, the nil-rate band will be reduced gradually, from £500,000 to £250,000 until 30 September 2021 before reverting back to £125,000 on 1 October 2021 (as the rate was prior to Budget 2020). We expect the Finance Bill to amend the existing legislation so are awaiting the detail, but understand that the relieving measures will continue to work in the same way (running off completion as opposed to exchange) and existing reliefs will continue to apply as before.
The business rates retail discount will continue to provide 100% relief from 1 April 2021 to 30 June 2021. This will be reduced to 66% business rates relief for the period from 1 July 2021 to 31 March 2022 capped at £2m per business for properties that were required to be closed on 5 January 2021, or £105,000 per business for other eligible properties. The government will also legislate to ensure that those businesses that have repaid sums equivalent to the business rates retail discount (such as supermarkets paying back business rates) are still tax deductible for both corporation tax and income tax purposes (to ensure that those businesses are no worse off). Please see our briefing on corporation tax changes.
Return to Budget 2021.
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