The Chancellor’s Autumn Statement has increasingly become the opportunity for a pre-Budget budget, and December 2012 was no exception. When it arrived, the March Budget was billed as a budget for an “aspiration nation” but contained few real surprises for commercial real estate. The headline-grabbing “Help to Buy” stole the show but subsequent reactions have been cautious. Elizabeth Shanahan and Andrew Waddell review the detail.

Unsurprisingly, given the current political and economic climate, the Budget targeted tax avoidance and among the new measures to be introduced are two targeting high-value residential properties held in corporate “envelopes”. The Finance Bill 2013 contains some welcome simplifications and rate changes along with the unexpected “Help to Buy” scheme to boost the residential market. We consider below the principal developments for the real estate sector. The Bill has different commencement dates for different clauses but, except where a commencement date is specifically mentioned below, the provisions dealt with here will come into force in the summer.

Residential property ‘envelopes’

One notable measure was the change to the residential property taxation regime. Following a series of consultations and the introduction of a 15% SDLT threshold in last year’s Budget, the Finance Bill 2013 heralds the second phase of the Treasury’s campaign against residential properties held in a corporate wrapper. This phase sees the introduction of a new tax, the Annual Tax on Enveloped Dwellings (or ATED), and certain changes to the capital gains regime.


The ATED is a fixed annual levy on all “single dwellings” beneficially owned by a company, a partnership which includes a corporate entity, or a collective investment scheme, and valued at over £2 million as at 1 April 2013 (and subsequently at five-yearly intervals). The levy varies between £15,000 and £140,000 a year, depending on the value of the property and there is an apportionment mechanism for any period of ownership less than a full year.

One of the most problematic aspects of the ATED lies in the definition of “single dwelling” and the complex valuation and aggregation rules that apply where multiple dwellings are transferred together. We have already been asked to advise on how the ATED may apply to student accommodation and other multi-let residential properties.

A broad range of exemptions apply, notably to property rental businesses, property developers, traders and financial institutions holding property as security, and some charities. The aim of the exemptions is, broadly, to exclude residential property used in some way to generate business profits. The charge takes effect from 1 April 2013.

Higher rate SDLT (15%)

One welcome change in the Finance Bill is that the higher rate SDLT legislation (for the acquisition by corporates of residential property worth over £2m) is to be amended to bring it into line with the new ATED. In particular, reliefs from the 15% SDLT charge are to be extended to match those of the ATED (albeit subject to a three year clawback if the conditions for relief are no longer met). As part of this, the two year trading requirement which applies to the exemption from higher rate SDLT for property developers is to be abolished.

Capital gains tax

New capital gains tax rules will mean that a corporate entity disposing of high-value residential property on or after 6 April 2013 will be subject to capital gains tax (at 28%) on any gain, rather than to corporation tax (now 23% as from 1 April 2013). Losses from the disposal of relevant residential property will be similarly ringfenced, which means that residential gains can only be offset against residential losses, rather than relieved against the corporate’s wider capital losses. This new regime will apply to both UK resident and non-UK resident corporates. The new capital gains tax charge broadly follows the ATED, so corporate entities that are exempt from the ATED should not fall within the new capital gains regime.

The rationale behind the change is to discourage residential property being held in corporates by ensuring that corporates are charged at a higher rate of tax both on acquisition (SDLT and ATED) and disposal (capital gains) of such property. Significantly, however, the capital gains charge only arises on the sale of the property and not on the sale of the shares in the corporate holding vehicle (as was previously considered during the consultation phase). The new regime will affect disposals occuring on or after 6 April 2013.

SDLT and sub-sales

The SDLT relief available for sub-sales (which applies to avoid a double charge to SDLT where A contracts to sell property to B and B assigns the sale agreement to C, or contracts to do so, before the sale has completed) has historically been an area rife for tax-avoidance. The Finance Bill 2013 seeks to close down the tax planning opportunities and narrow the scope of the relief by limiting the categories of transaction to which the relief applies, and by providing that the relief will be entirely withdrawn if the main purpose behind the sub-sale structure is to avoid or reduce SDLT. The new regime for sub-sales will apply from the date the Bill receives Royal Assent. However, in addition to the general rewrite of the subsales relief, the Government has introduced legislation in the Bill to close an existing loophole and has taken the unusual step of applying this amendment retrospectively to 21 March 2012. Taxpayers affected have until 30 September 2013 to file a supplemental or amended return and pay the outstanding tax without being subject to a penalty (although interest will still apply).

Lease premium rules

Amendments will be made to the lease premium rules to close down a loophole relating to the deemed short lease provisions that has been exploited by certain landlords. This will have effect for leases entered into on or after 1 April 2013.

General anti-avoidance rule

The Finance Bill 2013 will introduce a new weapon for HMRC’s armoury in combatting tax avoidance in the form of a general anti-avoidance rule (or GAAR). The GAAR is not specific to the real estate sector, but is designed to capture and prevent egregious tax planning across a number of taxes, including SDLT, corporation tax, the new ATED, and capital gains tax. The GAAR will primarily affect contrived “abusive” arrangements which cannot be regarded as reasonable tax planning and fall clearly outside the policy behind the relevant tax provisions.

If HMRC consider that the GAAR applies, they can refer the arrangement to a GAAR advisory panel and obtain a non-binding opinion. HMRC may then make just and reasonable ‘adjustments’ to the taxpayer’s return in order to counteract any advantage obtained by abusive tax arrangements. If the taxpayer disagrees with HMRC’s GAAR analysis, they can choose to litigate. It is intended that the GAAR will apply to only the most aggressive tax avoidance arrangements.


Among the battery of anti-avoidance measures, however, there were some welcome changes. As already mentioned, the scope of exemption from the 15% higher threshold SDLT has been extended; the complex provisions regarding abnormal rent increases and SDLT have been entirely abolished; the SDLT filing position where a tenant holds over after the expiry of a fixed term lease has been simplified (broadly, so that SDLT is paid in arrears); and an attempt has been made to simplify the reporting requirements for SDLT where an agreement for lease is substantially performed before completion although liability to SDLT still arises at the date of substantial performance.


There was good news also for REITs investing in other REITs. Under the new proposals, shares held in a REIT will constitute “good assets” for the purposes of the balance of business test and income from such investment will constitute exempt property income.

Capital allowances

The annual investment allowance for businesses investing in plant and machinery from 1 January 2013 is to be increased tenfold to £250,000 for the next two years. These provisions permit businesses to accelerate capital allowances on 100% of the expenditure on qualifying plant and machinery up to the allowance threshold.

Negotiations are ongoing with the Government regarding a re-introduction of allowances for expenditure on certain items of infrastructure, although nothing is expected for 2013. These allowances aim to replace the industrial buildings allowances that were withdrawn in 2008.

Help to buy

For many, the show-stopper in this year’s Budget was the new “Help to Buy” scheme introduced to support the housing market. The scheme includes a Government backed mortgage guarantee scheme available for three years from January 2014 to lenders who offer mortgages to individuals with a deposit of between five and 20 per cent. This guarantee, available on homes worth up to £600,000, is not just for first-time buyers, and is not restricted to new builds. The scheme also includes a “Help to Buy” equity loan available from 1 April 2013 for three years to individuals who wish to buy a new build home worth up to £600,000. The Government will provide an equity loan worth up to 20 per cent of the value of the new build home, to be repaid when the property is sold or otherwise according to the terms of the mortgage. The scheme is open not only to first time buyers but also to those looking to move up the housing ladder.

Round up

The Budget as ever holds up a mirror to the prevailing political concerns, so it is no surprise that this year’s Finance Bill heralds a barrage of targeted anti-avoidance measures in addition to the Treasury’s new deterrent, the GAAR. It is, however, reassuring to see that the impetus towards simplification and incentivising investment has not been lost, although the Chancellor may not have gone as far as some might have wished.