Amongst the changes announced in the Budget earlier this month that will be relevant to those with property interests, are proposals relating to the capital allowances regime, Stamp Duty Land Tax and VAT.

Capital Allowances

The main property specific points arising from this year's Budget relate to changes to the capital allowances regime.

Industrial building allowances and agricultural building allowances will be phased out over a four year period. Transitional rules will abolish balancing adjustments in favour of a system through which buyers take on the seller's pre-sale position. Unconditional contracts entered into, or contracts that have become unconditional, before 21 March 2007 will fall outside these transitional rules unless the contracts are varied significantly on or after that date. A number of businesses, particularly in the hotel or industrial market sectors, may find that they have unrelieved capital expenditure on which capital allowances were originally expected to be available.

In addition, the rates of writing down allowances available for plant and machinery in the general pool will be reduced from 25% to 20%, whereas the rate of writing down allowances for long-life asset expenditure will rise from 6% to 10%. In another change, fixtures integral to buildings will receive writing down allowances at a rate of 10%, rather than the current 25%, although it is unclear at this stage which fixtures will fall within the new category. These changes will come in from 2008/09 and will clearly impact on a claimant's cash flow.

There was some good news with the confirmation that the temporary 50% rate of first year allowances available to small businesses investing in plant and machinery will continue to be available in 2007/08. Similarly, a scheme introduced by Finance Act 2005, by which full tax relief is available for expenditure on the conversion or renovation of property to bring business premises, vacant for a year or more, back into business use, will have effect for qualifying expenditure incurred on or after 11 April 2007. Since the publication of the Finance Act 2005, the scope of the scheme has been modified by requiring the property to be situated in specifically listed areas. Note that the scheme excludes properties used in various trades including fisheries, shipbuilding and the coal and steel industries.

Stamp Duty Land Tax

The stamp duty land tax ("SDLT") provisions also received some tweaking, with the major change being an amendment to the general anti-avoidance rule introduced in the Pre-Budget Report (December 2006). The precise changes are yet to be published, but are made in response to representations received in relation to the original regulations.

The rules calculating SDLT on exchanges of property between connected persons will, from Royal Assent of the Finance Bill 2007, no longer fall to be treated as linked transactions for the purposes of calculating the correct rate of SDLT to be applied to each transaction. This should, in some situations, reduce the SDLT liability.

In an attempt to encourage the building of energy efficient housing, the Government also announced that the first £500k spent on the first purchase of a zero carbon home will, from 1 October 2007 be SDLT free, with SDLT only being paid at a rate of 4% on the balance of any consideration paid above that figure for the property. The energy efficiency of a home will be calculated using the Government's (soon to be updated) Standard Assessment Procedure for the energy rating of dwellings. This relief will be available for a period of five years.

The Government also announced that the SDLT relief that currently exists for affordable housing made available through shared ownership leases will be extended to arrangements using shared ownership trusts.

VAT

The Finance Bill 2007 will introduce new legislation (effective from 1 September 2007) allowing VAT to be recovered initially on land and buildings used for both business and non-business purposes, with VAT due on non-business use accounted for in subsequent VAT return periods (known as Lennartz accounting principles) over a ten year period (rather than the current 20 year period), bringing it in line with the capital goods scheme. This change is necessary following a recent European Court of Justice decision. Where Lennartz accounting principles have already been applied to land and buildings, adjustments made for the non-business use of assets after 1 September 2007 will need to be calculated on the new basis.

The taxable turnover threshold for determining whether a person must be registered for VAT has been increased from £61k to £64k. Similarly, the taxable turnover threshold for determining whether a person may apply for de-registration has also been increased from £59k to £62k.