The Chancellor of the Exchequer announced the 2012 Budget on 21 March. While aspects of the Budget are clearly favourable to UK business, particularly the reduction in the main rate of corporation tax to 24 per cent from 1 April 2012 with further reductions in the rate to 22 per cent to come by April 2014, the specific measures introduced in relation to real estate are less positive and largely anti-avoidance in nature. As widely predicted, anti-avoidance measures were heavily focussed on Stamp Duty Land Tax (SDLT) planning.
Stamp Duty Land Tax
The principal SDLT announcements were in relation to high value residential property. First, a new seven per cent rate of SDLT was announced (with immediate effect from 22 March), which will apply to the purchase of residential properties where the consideration is more than £2m. However, transitional provisions should, broadly speaking, ensure that the former five per cent rate will apply where a property is sold pursuant to a sale contract entered into before that date. Secondly, in an attempt to target the avoidance of SDLT through the transfer of shares in offshore property holding companies, a significantly higher rate of 15 per cent has been introduced with immediate effect for residential properties costing over £2m purchased through a “non-natural person”. This would principally target companies but will also include collective investment schemes such as unit trusts and any partnerships in which a non-natural person is a partner. In addition, it is proposed that residential properties held by non-natural persons will be subject to an annual charge with effect from April 2013, subject to consultation. The proposed charge is staggered, so that residential properties with a value of £2m to £5m held through such vehicles will be subject to an annual charge of £15,000 with the charge rising progressively to £140,000 per year where the value of the property is greater than £20m.
Capital Gains Tax
In a further attack on holding residential property through non-resident companies, the Government has announced its intention to consult on the introduction of a capital gains tax charge on the disposal of such properties. Subject to the outcome of the consultation, this measure may be introduced in the Finance Bill 2013. The Budget announcement does not go into significant detail regarding the potential charge. In particular, there is no mention of a value threshold, but the Budget announcements do refer to gains on sales of shares or interests, which suggests that the charging provisions may be wide.
Aside from SDLT, there were some notable announcements regarding capital allowances. The Government has announced the addition of a series of new enterprise zones and trading companies investing in plant or machinery for use within these zones will generally benefit from 100 per cent enhanced capital allowances. In addition, as previously announced, it is confirmed that the Finance Bill 2012 will include provisions to reduce the current rate of plant and machinery capital allowances to 18 per cent for main pool expenditure and eight per cent for special pool expenditure from 1 April 2012, and to tighten up the rules regarding the provisions for capital allowances made on a sale and purchase of a property.
The Chancellor also announced certain measures to address VAT anomalies. In particular, with effect from October 2012 supplies of self-storage will be subject to VAT at the standard rate, regardless of whether the operator has opted to tax in respect of the property. This will affect all such businesses which provide their customers with a discrete area of land and which had previously managed to stay outside the scope of VAT by making a supply of land with no option to tax.
Disappointingly, the Budget failed to announce the consultation into mortgage real estate investment trusts (“M-REITs”) which had been widely predicted. Mortgage REITs, which are common in the US, would provide an alternative to existing bank mortgage funding and could potentially free up bank lending capacity. It is to be hoped that continued representations on this issue will keep it on the Government’s agenda going forwards.