There were audible gasps at MIPIM yesterday as the Chancellor unveiled his shock raid on the commercial property industry.
SDLT rates on commercial freehold and lease premium transactions have changed, so they are now applied in a similar way to residential properties. Until the Budget, the SDLT rates on commercial property applied to the whole transaction value, the so-called “slab” principle. From today (17 March 2016) the rates will apply to the value of the property within each tax band, the “slice” principle.
The new rates and tax bands will be 0% for the portion of the transaction value up to £150,000; 2% between £150,001 and £250,000; and 5% above £250,000.
Buyers of commercial property worth up to £1.05 million will pay the same or less in SDLT. It’s been suggested that the change will see some 90% of investors in commercial property pay less tax but, given prices in London and other major cities, for most institutional investors the changes will result in more tax and will not be a popular move. Melanie Leech, chief executive of the British Property Federation, was quoted as saying “development in places like the Northern Powerhouse and Midlands’ Engine will now be held back as a result of this out-of-the-blue raid on commercial property transactions.”
In a further stealth move, George Osborne has raised SDLT rates for the rent on commercial leasehold transactions, with a new 2% rate applying on the grant of leases with a net present value (essentially the value of the rent over the term of the lease) over £5 million. The 2% rate will only apply to the slice over £5m, with the £150,001 – £5m slice remaining charged at 1%. This would mean that a tenant taking a 10 year lease at a rent of £1m would pay an extra £33,166 of SDLT. Given the amounts involved, it’s unlikely to have a material impact on leasing trends. Nonetheless, commercial property occupiers will always have to renew their leases or find somewhere else to rent, so the increase is a harsh strike at a soft target.