UK: Property Bulletin: Autumn/Winter 2012 - Uncertainty Remains


By Mark Webb

Difficulties for the property and construction sector remain. It would be near impossible for a reader to be unaware of the stagnant housing market nationally. Broadly, while London may buck this trend, development of the right type of property in the right place is incredibly difficult to achieve, not least from the perspective of available sites.

Given that backdrop, one would expect changes to planning rules and relaxation to business or construction taxes in order to attempt some kick-start or impetus to construction.

While there have been headline-grabbing announcements on planning (extensions to existing homes or commercial premises) quite the opposite is happening with direct costs – stamp duty land tax (SDLT) increases and the community infrastructure levy are doing little to free up construction. Robert King takes us through the recent SDLT developments, the headline rates, some of the hidden detail and recent court decisions. On the community infrastructure levy, Colm Egan of MacDonald Egan and Martin Courtney of Smith & Williamson give their views.

In this edition Henry Shinners also provides useful insight into recent hotel administration appointments, one even including a nuclear reactor, while Roland Brook outlines our business plan modelling service.


By Robert King

Following the Chancellor's "morally repugnant" remark in relation to SDLT avoidance during his Budget speech, SDLT is now very much in the news.

The Chancellor clearly had in mind the perceived avoidance of SDLT on high value residential properties acquired by individuals via a corporate 'envelope' and went on to announce an immediate increase (to 15%) to the SDLT charge on all residential properties worth over £2m purchased by companies and certain other 'non-natural persons'. The only exclusion available is for property development businesses with a two-year track record. Consequently, this measure goes way beyond the mischief that it was intended to address and catches genuine, commercial situations where no avoidance is present.

This was just one of a raft of developments affecting owners of residential properties over the last few months.

  • In addition to the new 15% charge, the Government raised the rate of SDLT on residential properties acquired by individuals to 7% with effect from March 2012.
  • To complement the 15% charge, there is a proposal to introduce an annual charge on high value residential properties held by non-natural persons: a 'mansion tax' by another name. Consultation is ongoing with a view to bringing in the new charge from April 2013. The proposed rate will start at £15,000 and go up to £140,000 for properties worth more than £20m. The consultation indicates the scope for this charge will mirror that for the 15% charge. This will, therefore, again catch many innocent and genuinely commercial situations and is causing consternation among landed estates and farming businesses, among others. A further proposal to apply capital gains tax to certain disposals of high value residential properties by certain non-natural, non-resident persons is also under consideration.
  • There is also consultation on amending the sub-sale rules. Sub-sale relief has been at the heart of most of the avoidance that has taken place in recent years, so some tightening up is not surprising. However it does serve a useful purpose in commercial transactions and so it is to be hoped that it will not be abolished altogether. Encouragingly, HMRC does seem to recognise that it is needed for genuine commercial circumstances.

    In any event the effectiveness of planning that has relied on sub-sale relief has been thrown into doubt by a very recent decision of the Tax Tribunal in the case of Vardy. Although the decision itself was on a very narrow point, comments made by the Tribunal have implications for all the variants of sub-sale planning that have been used to avoid SDLT altogether. The case will certainly encourage HMRC in its view that it can successfully challenge such planning.
  • The disclosure rules (DOTAS) have been amended to remove some of the exclusions which previously applied to SDLT. Going forward, any SDLT avoidance scheme that is developed will almost certainly have to be disclosed, meaning that HMRC will be in a position to close them down much faster.
  • The General Anti Abuse Rule is expected to come in next year and will, it has been confirmed, include SDLT in its ambit. This will complement an existing broad scope anti-avoidance provision in the SDLT legislation.
  • Under the banking code of practice, banks have explicitly undertaken not to engage in aggressive tax avoidance. Some banks have used this to justify a refusal to lend on property transactions where SDLT avoidance is involved.
  • The Solicitors Regulation Authority has issued a warning notice to solicitors that acting where SDLT avoidance is involved could constitute misconduct. Disciplinary proceedings have been taken against two solicitors. The ICAEW has recently issued a 'help sheet' to accountants in a similar vein.

In his Budget speech the Chancellor gave a clear warning that the Government will not tolerate avoidance activity in respect of SDLT, and will not hesitate to counter this with retrospective legislation if needs be.

So where does this leave us in terms of SDLT planning? The landscape has undoubtedly altered profoundly over recent months, but that does not mean that legitimate planning is not possible. It is all about using the reliefs and provisions within the legislation for the purpose for which they were intended. As is the case with tax planning generally, SDLT planning will need to have a sound commercial rationale if it is to be successful.


By Henry Shinners

Despite the summer of sport, 2012 has been a difficult year for hoteliers.

Asset prices and buyer interest that seem to fluctuate with the fortunes of a Premier League football club, a decommissioned experimental nuclear reactor, companies in administration that turn out to be solvent, incumbent operator tenants trying to hold us to ransom and shareholders with a financial interest that can't be traced – the lot of a Smith & Williamson insolvency practitioner dealing with our many hotel insolvencies during 2012.

As we go to press, we are dealing with the administrations of trading hotels in Guildford, Leatherhead, Hemel Hempstead, Farnham, Solihull and Aldermaston. Now why, I hear you ask, are some hotels in the South East of England – in locations within easy commute of central London – going into administration during a summer when we have surely had a record number of visitors to the area for the Olympics and Paralympics? That's not a question I have a definitive answer to, but the underlying reasons for failures in this sector can be summarised in a few short bullet points.

  • Businesses significantly geared up or were subject to highly leveraged buyouts in the pre-credit crunch period.
  • In some cases, these businesses also committed to interest rate hedges that meant that they have not benefitted from the low interest rate environment we have seen in recent years.
  • Businesses have experienced falling occupancy levels and/or downward pressure on fee rates as demand has weakened as a consequence of the recession and low business and consumer confidence. This of course ignores the Olympic effect.
  • As a general comment, poorly-managed businesses will always be vulnerable to failure, regardless of the wider sector and macro-economic conditions.

While we can't extrapolate our own involvement in a number of hotel insolvencies this year into a barometer of wider problems within the sector, there are some indications that we are seeing some patterns similar to that experienced in the sector during the early nineties recession, when hotel insolvencies were rife.

Perhaps the most interesting example we have seen this year is Aldermaston Court. This assignment consisted of the insolvency of two connected companies and the following assets:

  • the Manor Hotel – a grade II listed hotel with 33 bedrooms
  • Portland House – an 85,000ft² "iconic and award-winning" office complex which has been unoccupied since the Atomic Weapons Establishment vacated in early 2010
  • Oxford House – a derelict 15,000ft² former office space
  • residential lodges – four lodges, two of which are occupied
  • 144 acres of grounds consisting of woodland, grassland and an 11 acre lake.

By far the most interesting fact about this assignment is that from July 1959 to August 1962, a small privately-owned experimental nuclear reactor (Merlin) was operated in the grounds of Aldermaston Court and (sealed) pipes passing under the waters of the lake were used for secondary cooling. As if that were not 'interesting' enough, the water used on the estate is supplied from a borehole located within the grounds. However, I'm assured the facility is not radioactive and we expect to have concluded a sale of the assets by the time this article appears in print.

Keys to a successful hotel administration

In general terms, maximising the price that can be obtained for a hotel requires the business to be a going concern and trading well, even if the owner is in administration. Making sure that a competent operator or management team is in place for any trading that is to be carried out during the administration is therefore crucial to the outcome. This may involve the replacement of an incumbent operator or parachuting in a new manager in circumstances where trading is not at the expected level and especially in circumstances where the way the hotel has been run has contributed to the failure of the business. We have worked with a number of independent operators in this sector over the years and have found very close co-operation between our team and the operator/manager to be essential for achieving the best outcome for stakeholders.

Another key aspect to bear in mind when dealing with a turnaround or insolvency of any consumer-facing business is the position of the merchant acquirers. If that is not a phrase that is familiar to you, the merchant acquirers are the suppliers of debit and credit card machines and they are the ones who ultimately bear the cost if a consumer makes a claim to their credit card company for non-delivery of goods or services paid for by credit card. In any business where there is a delay between payment and supply, the merchant acquirers have a potential liability and it is extremely important to have them onside with our strategy because without the ability to accept credit cards, a hotel is not a viable business.

Finally, so much of a hotel's day-to-day business these days is generated online through travel booking websites that the operators of those websites are often a key stakeholder, particularly in circumstances where they are owed substantial sums of money. As with the merchant acquirers, getting the co-operation of the booking websites is critical to the success of any hotel turnaround or insolvency.


By Martin Courtney and Colm Egan

CIL is a new levy that local authorities are empowered, but not required, to charge on new developments in their area. CIL is, therefore, a tax on development.

Money raised by the community infrastructure levy (CIL) can be used to support development by funding infrastructure that the council, local community and neighbourhoods require. Currently, only six authorities are charging with three more to follow shortly. However, the expectation is that 50% of local authorities will adopt the CIL by April 2014. That said, many have yet to start any detailed work on how they will be dealing with the levy. London, on the other hand, is well ahead of the curve.

Certainly one criticism of CIL is that the money raised goes into a general pot which can be spent on projects unrelated to the development concerned. CIL is, however, intended to be a fairer approach to infrastructure funding in contrast to section 106 agreements, which are perceived to be negotiable and arbitrary, but whose benefit is directly linked to the relevant development.

Rates of CIL (known as the charging structure) are set by the relevant local authority and based on a funding gap, calculated with reference to their own infrastructure plans. The rate bandings for CIL may be zoned and will typically be different for residential, retail and other. The proposed rates are published in advance and have to be approved locally after consultation. CIL has passed largely under the radar so far but will be a significant cost, which one way or another will be passed onto the end user. Wandsworth has caught the eye recently with a proposed CIL rate for residential developments of £575/m2.

The legislation is structured along similar lines to normal tax legislation, with rules about scope of tax, charging mechanism, collection and administration. The key elements are as follows.

  • CIL is calculated with reference to the increase in gross internal areas of the proposed development from what is currently on the site. The result of this is 'net area chargeable' which is then multiplied by the relevant rate (£/m2).
  • The default position is that the liability sticks to the owner of the land, or leaseholder, if leasehold interest is greater than seven years. Liability can be transferred to a nominated third party.
  • The liability arises upon grant of planning permission, and will be collected upon commencement of the development.
  • Payment is upfront, but there is an instalment payments regime available dependent on size of the CIL charge.
  • There are defined rules for notification of relevant events, and a comprehensive system of penalties for non-compliance.

Key themes

Despite it being very early days, some common themes regarding CIL are already arising.

  • The obvious point is to secure planning permission as soon as possible before CIL is adopted locally.
  • Because CIL is broadly levied on an increase in internal floor space, CIL will be more expensive for zero-base greenfield sites and seems to favour brownfield developments with existing buildings that may need to be demolished.
  • Property rates must have been paid on the existing building on the site to be taken into account for the purposes of the CIL calculation.
  • There are real concerns of double CIL charges. CIL liability is triggered on grant of planning consent but subsequent minor amendments to the scheme requiring consent can trigger another CIL payment. This has been pointed out and a draft regulation is to be considered to correct this, though it may only apply from the date the regulation is approved.


There is discretionary relief from CIL in exceptional circumstances, but the indications are that this relief will be used sparingly. There was some hope that section 106 agreements might alleviate the CIL burden, but that seems to be fading fast. There are also specific exemptions from CIL for charitable concerns and affordable housing which, given the absence of grants, and with the figures now being offered by housing associations for the section 106 affordable element, is just as well.

Understanding the implications and conclusions

CIL is with us even though most local authorities are still behind with their core strategies and charging structures. This means CIL will not be in place for many authorities for a while. However, there will be a number of areas to consider.

  • Timing will be key. Planning departments can expect a pre-CIL surge of applications.
  • For accountants: project funding, cash flow profitability forecasts and pricing decisions will need to take into account CIL.
  • For tax advisers: there may be CIL mitigation strategies, and the interaction with the other mainstream taxes has to be considered. Company auditors will need to be mindful of recognition of CIL liabilities in the accounts.
  • Measuring existing internal space (the denominator in the CIL liability calculation) is not normally considered important in planning applications, but will become significant.
  • There are a number of notifications and compliance obligations which will occupy the accountants and lawyers.
  • There will be a steep learning curve with local authorities and collecting agencies as they become familiar with CIL.


By Roland Brook

The economy continues to bump along with little growth. However, this stagnation can mean that the acquisition of teams or businesses is completed more cost effectively – our clients are seeing opportunities.

The assessment of value should include a view regarding the viability of the target's business plan. The need for robust models is particularly acute at a time when economic conditions are difficult. Many spreadsheets evolve over time without well-structured design, no integrity checks and are poorly documented. Making a relatively simple change can often take a long time, result in errors and/or have unexpected consequences.

Building the model

The development of business plan models should normally include the following steps.

  • Familiarisation – review of any relevant available and/or existing data.
  • Kick-off meeting – agreement regarding new model inputs, outputs, calculations, potential model sensitivities and a project timetable.
  • Model outline – design of an agreement regarding structure for input, processing and output sheets.
  • Model preparation – detailed model development, including internal integrity checks, outline documentation and initial checks using test data.
  • Acceptance testing – model handover for review and detailed testing; appropriate amendments and then final version of the model.

Case studies

Overseas portfolio projections

This AIM-listed company managed a portfolio of 26,000 property units primarily in Germany. A team from Smith & Williamson developed an integrated financial model using data from several different sources which enabled a consortium of banks to assess viability and covenant compliance for various different scenarios.

Onerous lease obligations

This private company managed out onerous property leases for various quoted entities. Smith & Williamson was responsible for building a model which projected the amount and timing of future receipt/payment transactions for each leased unit, and then determined the net present value for the portfolio as a whole.

PFI template

This clearing bank needed to assess the initial viability of various PFI health projects. Smith & Williamson built a template to assist this evaluation.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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