Are your pips feeling squeezed?

On Wednesday 22 April Chancellor Alistair Darling made his second, and one of the most eagerly awaited, Budget statements. A top rate of income tax at 50% ... A diminution in the value of personal allowances ... A punishing restriction on reliefs for pensions contributions ... It is clear from whom Mr Darling is expecting the cash to service and repay the national debt.

With borrowing at record levels and the economy shrinking at its fastest rate in 60 years, it is not surprising that the Budget offered little by way of significant tax breaks or incentives.

Was this a Budget for real estate? The good news is limited. A re-introduction of 40% first year allowances should soften the blow of forthcoming refurbishments; an extension to trading loss carry back rules looks helpful but its worth is restricted in the detail; a postponement of the proposed community infrastructure levy; and there are welcome announcements on funds rules, in order to embed the UK's role as a centre of excellence for fund and asset management.

There were, however, notable absentees. This includes a failure to re-introduce empty business rates relief, despite the continued efforts of the Business Property Federation and others from within the real estate sector and professional practices. The Chancellor also declined to stimulate the residential investor market, failing to extend the real estate investment trust (REIT) regime to include residential REITs or relax the stamp duty land tax (SDLT) rules that currently penalise investors acquiring multiple dwellings. The existing (and ever-changing) SDLT lease regime has also been left "unsimplified" (for now).

Not surprisingly the emphasis was on the current state of the UK economy and the outlook generally. From a practitioner's perspective, the Budget was devoid of the surprises and technical changes of recent years (although the Finance Bill still weighed in at a hefty and respectable 126 clauses and 61 schedules). However, with the pre-Budget report still several months away, and the economy struggling to bounce back, we must make the most of what morsels the Chancellor has served up.

Was this a Budget for real estate? The highlights are as follows.

Capital allowances

First-year allowances (FYA) at 40% are to be re-introduced for expenditure incurred on plant and machinery (including fixtures) for the period of one year from April 2009 (from 1 April for corporation tax payers and from 5 April for income tax payers). This will be in addition to the existing Annual Investment Allowance (AIA) of £50,000 and will be available to businesses of all sizes (sole traders, partnerships and companies).

New expenditure falling within the main pool of allowances will benefit. Generally, the main rate of writing-down allowances for plant and machinery is 20%. "Integral features" (of particular significance to the real estate sector and include various fixtures that are integral to a building such as electrical, heating and water systems) and "long-life" assets will not benefit from these measures and will continue to receive writing-down allowances at just 10%.

Trading losses

Existing one-year trading loss carry-back rules are to be temporarily extended to cover three years (for accounting periods ending in the period 24 November 2008 to 23 November 2010 for companies and for tax years 2008/09 and 2009/10 for sole traders and partnerships). The relief will be available to businesses of all sizes. However, the benefit will be of greater significance to small businesses, including small developers and builders.

However, the amount of losses available to be carried back beyond one year is to be restricted to £50,000 (for each of the two years, potentially a further £100,000 of losses could, in aggregate, be utilised). Previously businesses were only able to carry back trading losses generally for one year and for three years only in the course of start-up businesses and businesses ceasing to trade. The amount of losses that can be carried back to the preceding year remains unchanged.

Value added tax (VAT)

The option to tax (VAT-election) rules are to be "simplified".

At present, tax payers who have made exempt supplies in respect of land and buildings must seek HM Revenue & Customs' (HMRC) permission before opting to tax those land and buildings, unless they satisfy one of four automatic permission conditions (APCs). In addition, HMRC currently operates two informal extra-statutory concessions in relation to options to tax. These concessions allow tax payers to recover more VAT than they would be entitled to on a strict interpretation of the law. One of the previous APCs (condition 3) has been replaced and the two concessions will be withdrawn (one will be completely withdrawn and the other withdrawn in part). HMRC hope that the new APC will reduce the number of formal requests by tax payers for permission to opt to tax land and buildings.

HMRC has published a VAT information Sheet (06/09) containing the new APC and also covering the two concessions. The new APC came into effect from 1 May 2009. The new APC is longer than the other APCs and contains two requirements. The first requirement relates to outputs and looks at supplies that the tax payer intends or expects to make. The second requirement relates to inputs and looks at VAT incurred by the tax payer on its costs and purchases. The concessions will continue to apply until 30 April 2010.

As previously announced, the standard rate of VAT reverts to 17½% from 1 January 2010. Anti-avoidance provisions will be introduced to counter schemes that purport to apply the existing 15% rate to supplies made after that date. It is questionable (at best) how much of a positive impact this 2.1% reduction has had on business. For many still counting the cost of implementing price changes and changes to their accounting systems, there is the prospect of repeating it all again in the not too distant future.

The existing compulsory VAT registration turnover threshold will be extended from £67,000 to £68,000. In addition the existing de-registration turnover threshold will be increased from £65,000 to £66,000. Both these changes were effective from 1 May 2009.


The current SDLT "holiday" for residential acquisitions will be extended to 31 December 2009.

The Government announced in September 2008 that it will temporarily increase the SDLT-exempt threshold in respect of residential properties from £125,000 to £175,000 for a period of one year ending on 2 September 2009. This extension is welcome. However, particularly with regards to the south east of the United Kingdom, it is disappointing that the Chancellor did not take the opportunity to implement more radical changes to the SDLT rates and/or thresholds to stimulate the real estate market.

Leasehold enfranchisement relief will be extended to all those who exercise their enfranchisement rights for transactions with an effective date on or after 22 April 2009. Previously relief was only available to a right to enfranchise (RTE) company. However the provisions relating to the use of RTE companies are not yet in force such that the existing SDLT relief could not be used. This problem was highlighted in the 2008 High Court decision in Elizabeth Court (Bournemouth) Limited v HM Revenue & Customs [2008] EWHC 2828 (Ch). In that case the tenant owners of flats in a residential block had used the appellant company as a vehicle to purchase the freehold and long leasehold interests in respect of the block. The company was unsuccessful in its attempt to utilise the existing SDLT RTE company relief. The High Court upheld the Special Commissioners' decision that such SDLT relief was ineffective until the legislation (the Commonhold and Leasehold Reform Act 2002) enabling the use of such RTE companies came into force. The changes to the existing SDLT relief will remove the condition that the relief is only available to statutory RTE companies but, in spite of its unfairness, will not be retrospective.

Current reliefs enjoyed by registered social landlords on acquisitions are to be extended to profit-making bodies who qualify as "registered providers of social housing" and the acquisition is funded by way of a public subsidy. This extension to the existing SDLT relief is in response to anticipated changes to the social housing sector. When the Housing and Regeneration Act 2008 comes into force, profit-making companies will be able to participate in a new system for social housing.

There is to be simplification of the SDLT consequences of acquisitions by tenants under the "Rent to HomeBuy" scheme. The "Rent to HomeBuy" scheme, aimed at first-time buyers, was announced in 2008. The existing SDLT treatment proved to be overly complicated and this simplification (for transactions with an effective date on or after 22 April) is welcome.

Draft legislation has been published that would extend the existing disclosure of SDLT avoidance schemes regime to residential properties with a value in excess of £1 million. In addition the proposed rules would enable HMRC to identify the user of such SDLT avoidance schemes. Under the existing regime which applies to commercial properties, where the disclosure is made by a "promoter" (such as a solicitor or accountant) the identity of the user is not apparent to HMRC.

Landfill tax

From 1 April 2010 the standard rate of landfill tax will increase by 20% (or £8) to £48 per tonne. Particularly in the current economic climate, this is unwelcome news for developers and potentially increases construction costs.

Following the Court of Appeal's decision in HM Revenue and Customs v Waste Recycling Group Limited [2008] EWCA Civ 849, where the use of materials at a landfill site for engineering purposes did not give rise to a tax liability, changes will be brought in to ensure that in the future such uses of material at a landfill site are subject to tax. This is a disappointing, although perhaps not surprising, result. It, yet again, begs the question whether so-called environmental and green taxes are simply revenue-raising "stealth tax" for the Government.

Business rates

Unfortunately the talking point was what was omitted rather than what was actually announced.

The Government has announced that businesses will be able to defer (to 2010/11 and 2011/12 bills) payment of 60% of the increase in their 2009/10 business rates bills and that there will be measures introduced to assist (by spreading increases over three years) businesses affected by the withdrawal of small business rates.

The Government had, under pressure, already agreed to some extended relief in the case of empty properties with a rateable value of less than £15,000. However, as yet, there is no u-turn on the scrapping of empty rates relief generally, which came into force on 1 April 2008.

Community infrastructure levy

Implementation of the proposed community infrastructure levy (a planning tariff and the latest incarnation of the scrapped planning-gain supplement) has been delayed until 6 April 2010.

Transfers of income streams

New anti-avoidance legislation will ensure that receipts derived from a right to receive income are taxed as income for income tax and corporation tax purposes. Thankfully, following representations made by interested parties, the draft legislation will be amended so as not to catch transfers of income resulting from the grant or surrender of leases.

Alternative investment bonds

Land asset-based securities issued under alternative investment arrangements (Islamic finance) are inefficient under the UK tax regime. The aim of proposed new SDLT and capital gains tax reliefs is to ensure that these alternative bonds are subject to taxation equivalent to "normal" bonds.

There will also be capital allowance changes. A person obtaining finance using these bonds will remain entitled to allowances even though the land itself is held by the bond issuer. These changes are due to take effect from Royal Assent.

A previously buoyant alternative finance market had slowed, in part, due to the UK tax system that imposed tax on various stages of the issue of sukuk (bonds) in a way that it did not do with more "traditional" bond structures. The Finance Act 2007 introduced legislation which enabled sukuk to be taxed for corporation tax on income purposes in the same way as other bonds however the legislation did not take into account the fact that sukuk are asset-based (typically land) such that potential tax concerns go further than merely how income is taxed. The proposed changes are welcome and aim to provide a more "level" playing field to enable the United Kingdom to continue its drive to be the global hub for alternative finance.


Anti-avoidance legislation will be introduced to prevent companies qualifying for REIT status where there has been "unacceptable" restructuring in order to meet the REIT conditions (for example where properties are let out by one member of the same economic "group" to another without the properties leaving the group).

There is to be further tinkering with the REIT rules to make the regime work more efficiently. For example REITs will be allowed to issue convertible preference shares (improving a REIT's ability to raise capital in these difficult times) and the "balance of business" test will have a single accounting definition to cover both groups and single company REITs.

The existing REIT regime was introduced by the Finance Act 2006 and, with only relatively minor changes to the rules in the meantime, the UK REIT has not enjoyed the success of some of its overseas relations. However it is encouraging to see that consultation with (and lobbying by) industry has resulted in sensible changes to the law.


From 1 September 2009, authorised investment funds (AIFs) can elect to be treated as "tax elected" funds, so allowing investors to be treated for tax purposes as if they had invested directly in the fund's underlying assets. The effect of this is that the point of tax will be moved to the investor (and away from the AIF). At present, whilst AIFs are exempt from tax on gains, they are subject to corporation tax on income at a special rate of 20%.

Investors in certain types of transparent offshore entities will have their tax compliance simplified by being allowed to ignore disposals of underlying assets by those entities (effective from 1 December 2009).

A new "offshore fund" definition will be introduced with effect from 1 December 2009, using a characteristics-based approach rather than the current regulatory definition of "collective investments scheme". The existing regime was introduced in 1984 and transitional rules are expected to provide "grandfathering" for existing investments.

A "white list" of transactions that are not trading transactions is to be introduced to give certainty to investors in AIFs (with effect from 1 December 2009).

Looking forward to the 2009 Pre-Budget report

Overall the Budget provided limited comfort to the real estate sector and the absence of much called-for relief was notable. We give our suggestions for the 2009 Pre-Budget Report later this year (or sooner). You will no doubt have your own thoughts on this.

In no particular order:

  • A reintroduction of empty property relief for business rates. The scrapping of empty rates relief has failed to stimulate regeneration. The economic climate has, since 1 April 2008, shifted dramatically and this presents a further potential financial burden to already stretched landlords and developers faced with struggling tenants.
  • A (temporary) cut in the rates of SDLT and an updating of the existing thresholds. The SDLT "holiday" has so far been limited to the residential sector. However, even if relief does not extend to the commercial sector, stimulus of the residential housing market would surely boost consumer confidence and have a knock-on beneficial effect for commerce and industry. The existing thresholds are antiquated and a sensible approach is required.
  • A simplification of the existing SDLT lease regime. The current compliance burden is disproportionate to the potential tax at stake with a likely result that informed tax payers (and their advisors) comply, at significant cost, whilst many simply ignore the complex and ever-changing rules (should tax payers have certainty?) either through lack of understanding or awareness or otherwise.
  • Further reform of the REIT regime. After much anticipation, the existing REIT regime is a slight disappointment and a wasted opportunity – particularly when compared to the regime in other jurisdictions (have you seen what our friends across the Atlantic achieved?). More could be done to maximise the potential for this "new" vehicle, including the creation of residential REITs and opening up the regime to private companies with real estate interests.

This article was published in Property Law Journal in June 2009.