Legal briefing | Real Estate, Construction & Engineering, Real Estate Tax |

Further government support for cladding repairs, with tax raises on developers towards meeting cost

Overview

In the face of mounting pressure, the government, on 10 February, announced a 5 point plan for investment in building safety, with a further £3.5 billion earmarked for the removal of unsafe cladding.

The proposal will be funded by a new levy and tax on residential property developers.

While, clearly, a helpful step (as indicated by endorsements in the accompanying press release), the proposals will not please everybody - there will be winners and losers.

The detail and speed of implementation will be key.

 

Background

The issue around the need to replace unsafe cladding and to improve other safety measures in residential blocks has, since the Grenfell Tower tragedy, blighted certain parts of the housing market, where, in many cases, the costs of making the necessary safety measures have fallen to leaseholders. The problem was acknowledged by the government, with an assistance package announced in last year's Budget. This has not, however, resolved the problem - far from it - with many leaseholders still dealing with high repair and ongoing safety costs, administrative delays and uncertainty of valuations. As a result, remediation works are not being carried out to the extent necessary, with safety concerns continuing and the adverse impact on property valuations restricting the ability to raise mortgages and sell affected properties.

 

The 5 point plan

There is not much detail on this, as yet, but the plan is as follows:

  1. the government will pay for the removal of unsafe cladding for leaseholders in all residential buildings 18 metres and over (6 storeys) ("high-rise buildings") in England. (This threshold is based upon Home Office analysis of fire and rescue service statistics, which shows that buildings between 18 and 30 metres are four times more likely to suffer a fire, with fatalities or serious casualties, than apartment buildings in general);
  2. a "generous" finance scheme will be set up to provide reassurance for leaseholders in buildings between 11 and 18 metres (4 to 6 storeys) ("lower-rise buildings"), ensuring they never pay more than £50 a month for cladding removal;
  3. an industry levy and tax will be introduced to ensure developers contribute to costs;
  4. a world-class new safety regime will be introduced to ensure that a tragedy like Grenfell never happens again; and
  5. the aim of providing confidence to this part of the housing market, including lenders and surveyors.

 

Who benefits?

At the level of the occupier, there are two levels of beneficiary, but their positions are radically different.

Leaseholders in high-rise buildings are likely to be delighted that the government will be fully funding the cost of cladding repairs. However, the measures may be significantly less warmly received by those in lower-rise buildings, who will still have to bear the full cost, albeit that - "where it is needed" - they will be able to benefit from a new, long-term, low interest, government-backed financing arrangement to pay for cladding removal. This loan will be tied to the building / property, rather than be personal to a leaseholder. No leaseholder will also ever pay more than £50 a month towards the removal of unsafe cladding. Stated to be "generous", while the intention must be right, it is likely that this will not be how the finance scheme is viewed by leaseholders of these lower-rise buildings.

The press release gives little detail on timing or other implementation aspects. For example, quite how is assessment of what is "needed" determined? What happens if the property is sold? What, for example, would be included in the relevant cost that the leaseholder is to pay for? If VAT is included, the costs, effectively, rise by 20%. Such an additional cost would prolong, also, the ultimate repayment. Options that the government could explore to assist further here would be a VAT exemption, reduced 5% rate or, even better, zero-rating for qualifying expenditure - to side-step this extra issue altogether. Such a measure could potentially also benefit those impacted, who do not come within either of the specific funding measures discussed above (maybe we will see some lobbying on this one).

The aim here is, nonetheless, to provide reassurance and security to leaseholders and confidence to mortgage providers that, where cladding removal is needed, properties will have a value and be worth lending against.

 

Next practical steps

At a practical level, the government is going to work with industry to reduce the need for EWS1 forms (that is the form required by lenders and valuers from residential building owners above 18m in height and with some form of combustible cladding or combustible material on balconies to complete their valuations) and to bring about a proportionate valuation and risk assessment process.

Legislation will also be brought forward this year to tighten regulation of building safety, and the construction products regime will be reviewed with a view to stopping the problem ("malpractice") arising again.

 

Who doesn't benefit? - The new tax proposals

The funding and even the financing scheme have, of course, all got to be paid for, somehow. So, the plan also includes two new measures, expressly targeted at residential developers (using the less flammable quote of the two in the press release) to "ensure that the largest property developers make a fair contribution to the remediation programme, reflecting the benefit they will derive from restoring confidence to the UK housing market".

First, a ‘Gateway 2’ developer levy (tying in with – but separate to - the Gateway Regime in the new Building Safety Bill), will apply when developers seek permission to develop certain high-rise buildings in England. We need to wait to see how this will work and expect a consultation, but, at this stage, it would seem like this may be more like a CIL payment, rather than an additional planning section 106 type levy.

In addition, a new tax on the UK residential property development sector, will be introduced, intended to raise at least £2 billion, over 10 years, to help pay for cladding remediation costs. While it is intended that this should be brought in from 2022, the potential form of the measure is not stated, other than that the government will consult on the policy design (presumably alongside that for the new levy) in due course. The industry will be looking at this carefully, including its knock-on implications.

While many residential developers have already allocated funds to remediate impacted buildings, the announcement had an immediate impact on their share prices. Whilst developers will benefit from the restoration of confidence to the UK housing market and their buildings being made safe, they will along the way have to bear the costs of the new levy, a new tax and, potentially, the remedial works to their buildings.

 

Devolved administrations (Scotland, Wales and Northern Ireland)

While this fund will be focussed on England, it is intended that help will also be given to Scotland, Wales and Northern Ireland. How that looks in practice, again, remains to be seen. The press release states that "The devolved administrations will receive additional funding through the Barnett formula, except where new departmental spending is funded by an England-only levy (where the devolved administrations can instead implement their own levies should they choose to do so)".

 

  Follow us on LinkedIn for all our updates from Travers Smith Tax and Travers Smith Real Estate

GET IN TOUCH

Read Ryan Fordham's Profile
Read Sarah Quy's Profile
Read Cathryn Vanderspar's Profile
Read Ian Zeider's Profile