UK: Budget 2003 - Its effect on the real estate sector

Last Updated: 10 April 2003

Overall the 2003 budget contained few surprises for the real estate sector. Least welcome, although not entirely unexpected, is the proposed new structure for lease duty and the tightening up of rules on stamp duty relief clawback.

The key Budget changes for the real estate sector are summarised in this e-bulletin. More detail on these changes will be available on 16 April, when the Finance Bill 2003 is due to be published. Our tax department has produced a detailed briefing outlining the main proposals contained in the Budget which is available on our website.

Stamp duty


  • no changes to the rates of stamp duty
  • no immediate changes to the stamp duty thresholds
  • an indication that in future the Government may be prepared to treat residential and commercial property differently

Land in disadvantaged areas (enterprise areas)

Stamp duty on transactions for commercial property located in disadvantaged areas is abolished entirely from 10 April 2003. This is now a very valuable relief for dealings in property located in these areas, given that there is no longer any cap on the size of commercial property transactions which qualify. There are approximately 2000 disadvantaged areas across the UK - many in areas earmarked for urban regeneration projects.

The relief will be reviewed in 2006 as part of an EU wide review of State Aid rules. Fresh EU approval will be required for the relief to continue after 2006.

The disadvantaged areas stamp duty exemption was introduced in November 2001 for transactions in any property located in a disadvantaged area where the consideration did not exceed £150,000. The £150,000 threshold remains in place for transactions in residential property. The Revenue has published a Statement of Practice on how to apply for the relief and on the meaning of "residential property".

Land - immediate anti-avoidance changes

A number of changes to the stamp duty group relief and acquisition relief clawback rules introduced in 2002 will be made to strengthen the anti-avoidance measures. The changes generally apply to documents executed after 14 April 2003. The existing rules will continue to apply where the document gives effect to a contract made before 10 April 2003, unless the document results from the exercise of an option, an assignment, or further contract made after 9 April 2003.

The changes are:

  • the extension of the clawback period from two years to three years
  • the closing of the loophole under which clawback could be avoided by selling the transferor and transferee together
  • the withdrawal of group or acquisition relief unless stamp duty has been paid on the market value of land that is subsequently reacquired by the original company

Changes taking effect from 1 December 2003

The modernised regime for stamp duty, on which the Government has been consulting for some time, will be introduced from 1 December 2003. Draft legislation will be included in the Finance Bill. The new regime will replace the current document-based stamp duty charge with a transaction-based stamp tax. Features of the new regime which were announced in Budget 2003 will include:

  • the abolition of stamp duty on transactions involving property other than land, shares and interests in partnerships. Debts and other receivables, for example, would not be liable to stamp duty
  • the expansion of anti-avoidance powers to discourage the transfer of properties into companies and other special purpose vehicles (SPVs) with a view to mitigating stamp duty
  • a revised threshold for the exemption of stamp duty on the transfer of commercial property from the current threshold of £60,000 to £150,000. The revised threshold will also apply to premiums on the grant of a lease of commercial property. There will be no change to the £60,000 threshold for residential property
  • a new method for calculating stamp duty on the rental element of new leases (subject to consultation). From 1 December 2003, the charge will be 1% of the net present value (NPV) of all the rental payments due over the term of the lease calculated by reference to the Treasury’s "Green Book" using a discount rate of 3.5%. In many cases this will lead to significantly higher stamp duty charges than under the current rules. Commercial leases where the NPV of rents does not exceed £150,000 will be exempt from duty on rent
  • for leases granted from 1 December 2003, VAT will only be part of the consideration for calculating stamp duty on the rental element if the landlord has opted to tax by the time the lease is granted. Currently, VAT on rent is treated as stampable consideration unless the landlord undertakes not to opt to tax
  • changes to be made to ensure that the stamp duty cost on purchases financed by alternative mortgage products is comparable to the stamp duty costs on purchases financed by conventional mortgage products. It is believed that this measure is intended to be a relieving one aimed at Islamic financing methods

The modernised regime will come into force for transactions completed on or after 1 December 2003 and where the transactions relate to contracts entered into after Royal Assent to the Finance Bill (likely to be late July or early August 2003). Transactions completing contracts entered into before Royal Assent will be subject to the existing stamp duty regime, whenever completion occurs. However, there will be special rules for options entered into after 16 April – transactions arising from these options may be subject to the new stamp duty rules. More detail on the transitional regime will be available when the Finance Bill is published.

Registered social landlords

Exemption from stamp duty (retrospective to 1 January 2000) for indefinite short-term tenancy agreements entered into by Registered Social Landlords with housing associations to house the homeless.

Stamp duty on land – partnerships

There will be further consultation on the stamp duty treatment of the transfer of land into and out of partnerships and on the need for a stamp duty charge on transfers of interests in partnerships that hold UK land. Pending any new measures, the current stamp duty treatment of partnerships will continue.


New freehold buildings

Measures introduced in November 2002 to block schemes to avoid VAT on the sale of new freehold buildings will be strengthened so that payments made more than three years after the building is completed remain VAT standard-rated. The changes will also block schemes involving the sale of vacant land and the subsequent construction of commercial buildings.

Non-business use

From 9 April 2003 the apportionment of VAT in respect of businesses which purchase land and buildings to be used partly for business and partly for private or other non-business purposes will be adjusted. From this date the input VAT on the purchase of land or buildings will be apportioned between business use and non-business use at the time of purchase, and only input VAT apportioned to business use will be recoverable.

Property derivatives

Discussions will be held with the real estate industry on the appropriate tax treatment of new property derivative products.

Company tax reform

A consultation paper on possible reform of corporation tax was published in August 2002. This has significant implications for property investment companies – see the e-bulletin of August 2002 which is available on our website. This document covered:

  • tax treatment of capital assets, such as land and shares
  • streamlining the system for giving relief for losses
  • differences in the tax treatment of trading and investment companies

A second consultation document will be published in the summer setting out the Government’s strategy for taking forward these reforms. This continuing consultation on corporation tax reform will also consider the tax treatment of commercial property.

CGT taper relief – let property

  • let property used by an unincorporated trader will be treated as a business asset for capital gains tax taper relief purposes from 6 April 2004. Business assets are treated more favourably for taper relief purposes than non-business assets

Construction Industry Scheme

  • the Construction Industry Scheme will be reformed in April 2005, with a view to reducing the regulatory burden on business

Article by Neil Warriner, Andrew Prowse and Emma Nendick

© Herbert Smith 2003

The content of this article does not constitute legal advice and should not be relied on as such. Specific advice should be sought about your specific circumstances.

For more information on this or other Herbert Smith publications, please email us.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions