UK: Property Bulletin: Innovation Leading The Way - Spring 2013

Last Updated: 23 April 2013
Article by Mark Webb, Robert King, Martin Courtney, John Voyez and Laurence Bard


By Mark Webb

Spring is threatening to arrive and possibly growth is threatening to return to the UK economy. Despite the possibility of 'green shoots', there was in reality little given away in the 2013 Budget.

The headline announcements were around assistance for buyers to move up the property ladder. That may provide a fillip to home ownership and new build schemes, but the difficulties of chronic under supply of the right type of housing in the right place remain and may well stall this initiative.

In this edition, Robert King takes a look at the Budget changes, in particular on SDLT, while Michael Edginton of Acasta Consulting sounds a cautionary note on pricing policy in the construction industry.

Without the Chancellor really grasping the nettle and helping the property sector root and branch, we look at some of the less obvious tax reliefs for property companies, patent box and research and development.

Manon Sel of Legacy Portfolio and Martin Courtney look at ways of recycling surplus property and John Voyez rounds of this edition with a view from a rather cold MIPIM.


By Robert King

The Budget saw confirmation of the introduction of the new annual tax on enveloped dwellings (ATED) with effect from 1 April, and the extension of UK capital gains to certain disposals of high value residential properties on or after 6 April. Both of these regimes apply to single dwellings valued at more than £2m held by companies and certain other non-natural persons. Together with the penal 15% rate of stamp duty land tax (SDLT) on acquisitions of such properties by non-natural persons, which took effect from Budget day last year, these complete the three sets of measures to combat the so-called 'enveloping' of high end UK residential property in companies (usually London-based). The Government was convinced that such ownership structures were being used to avoid SDLT by selling the shares in the company rather than the property. The motivation is, in fact, not usually SDLT avoidance. It may be down to inheritance tax (IHT) planning, avoiding forced heirship issues, or a need for anonymity. Where such factors are relevant, alternative solutions may now need to be considered.

On a more positive note, there have been extensive consultations over the last 12 months and these have resulted in a wide range of exemptions common to all three regimes which will take out most situations where the property is used for legitimate business purposes. Where an exemption is available, the right answer may be to do nothing. Otherwise, a decision needs to be made as to whether or not to de- envelope. Many non-doms, for instance, may see ATED as a reasonable price to pay for continued IHT shelter. De- enveloping itself raises complex tax issues which will require careful planning. The right answer will be very fact specific.

Fortunately, with rebasing to April 2013 for the new capital gains charge, the pressure to take swift action has receded somewhat and a considered view can be taken.

There is little doubt that these new taxes will have a distortive effect on the market. This will particularly be the case for properties around the crucial £2m threshold. Indeed, anecdotal evidence already suggests that this is happening with estate agents noting a sharp fall in transactions. There will also be a distortive effect around each of the ATED band thresholds. In addition, the exemptions from the 15% SDLT charge do not come into effect until Royal Assent to the Finance Act, usually in late July. Transactions which will benefit from these exemptions will undoubtedly be deferred, leading to further market distortion.

Also included in the Budget was a rewrite of the sub-sale rules. These rules have been at the heart of most SDLT avoidance, as a result of poor drafting of the legislation and consultation has been on-going with regard to reforming the sub-sale provisions. Unfortunately, HMRC has gone for a substantial rewrite, with highly complex draft legislation being put forward. It is questionable whether this is needed given existing anti-avoidance rules and the impending General Anti-Abuse Rule (GAAR). Sub-sale relief serves a crucial role in many commercial transactions which have no element of avoidance attached to them at all. Despite HMRC saying that it does not want the new rules to impact on such transactions, the draft legislation is so complex and unclear that there must be a concern that it will have a detrimental effect.

Finally, we saw retrospective legislation to outlaw certain SDLT avoidance schemes with effect from March last year. Retrospection in tax law is rare – it goes against the principle that a person should be able to proceed on the basis of the law as it then stands. On the other hand, George Osborne did say in his Budget speech last year that he would not hesitate to use retrospective legislation if it was found that the SDLT rules, in particular the sub-sale rules, were being abused. Clearly this was no empty threat. This will act as a further deterrent, as if any were needed, to people who might otherwise consider taking part in aggressive SDLT avoidance. It is, however, to be fervently hoped that this is a one off and not the thin end of the wedge. Retrospective legislation is bad in principle and should be resisted in all but the most extreme circumstances.


By Michael Edginton
Director, Acasta Consulting

'Under-pricing' could refer to a potentially beneficial commercial pricing policy of gaining increased market share or getting in with new clients. However, in main contracting, where gross profit margins in benign times are only around 5% and net are down to paltry levels of maybe 0% to 2%, any under-pricing puts you straight into negative territory and really is a 'suicide bid' in all but name.

Many contract employers' consultants admit they're reviewing tenders at up to 20% below the second cheapest bidder. Since contractors are pre-screened, of similar stature and invariably use the same subcontractors' and suppliers' prices, it is incredible that they could produce savings in quality and time to warrant such differences.

We at Acasta Consulting suspect that in competitive UK tendering there are only two types of main contractors – those working and losing money, and those that have no work because they won't put in a sub-economic bid. In our construction corporate recovery services for banks and insolvency practitioners, we see the results of such practices all too often and not just in recessionary times.

The current issue is to get the people who are going to blink first out of the game as soon as possible – the companies who haven't got the courage, conviction, or more importantly the genuine net cash position, to not fall into the death trap of winning turnover at less than the actual physical costs it will take to complete on that turnover.

Our lectures on construction insolvency, which illustrate 'the magic of over-value', stress that the positive cash-flow available to contractors is vastly underestimated and is actually so large that it can readily mask profitability issues. Cash at the bank should not reassure anyone of their balance sheet solvency and is a better indication of the maximisation of contract applications and the delay of downstream payments. When we see large cash balances we just worry about their beleaguered subcontractors, who are the ones that are actually funding these contractors, not their bankers. Recent news about the top UK contractor's net cash balances (after borrowings) being down to unprecedented levels must surely be worrying their supply chain.

Which contractors are going to fail first? Unfortunately, we'd imagine it will be those without work who have resisted suicide bidding, and that the contractors working at sub- economic levels, who will attempt to pass down pain to their subcontractors, are going to survive the longest but have the slowest death.


By Laurence Bard

R&D is not restricted to the oft-cited life sciences, but covers companies in virtually every industry which are undertaking some form of innovation.

Industries for which we have successfully made claims include construction, resources, telecoms, and financial services as well as the more obvious manufacturing, energy, and life sciences industries. Software, internet and communications are good examples where R&D takes place in supporting functions as well as industries in their own right.

In the property sector, seeking to devise new methods of design and construction would potentially qualify, particularly in new energy saving developments. Sophisticated software is often developed to support construction methods (e.g. in the specification of steel), and for the sale and management of property.

Projects must seek to achieve (but not necessarily succeed) an advance in science or technology through the resolution of scientific or technological uncertainty. R&D may be undertaken even where similar development has been undertaken by a competitor but retained as a trade secret. There is inevitably considerable ambiguity in many cases, so that each case must be looked at on its own merits.

It is not necessary to have or seek any patents to claim R&D relief, but many companies will do so and be able to take advantage of the new 'patent box' reliefs which were introduced from 1 April 2013.

What's it worth?

Where a company is tax paying for the year ended 31 March 2013, the extra relief could be worth 31% of cost. Alternatively, where a company is loss making, the relief can give rise to tax repayments up to 25% of the cost, even where no corporation tax or PAYE/NIC (for periods ending after 31 March 2012) has ever been paid. This is of considerable assistance to start-ups in need of cash to fund their R&D.

To qualify for these levels of R&D relief, the company must have fewer than 500 employees, and either turnover not exceeding €100m, or balance sheet total not exceeding €86m – including certain associated companies.

A lower level of relief applies to larger companies, but from 1 April 2013, a repayable credit for lossmaking companies will become available.

Making claims

There are numerous other rules, and claims have to be made within two years of the end of an accounting period. HMRC gives no leeway here. It also has special R&D units who consider claims in detail, so it pays to prepare them carefully.

Acquisitive groups should check that their targets have not missed out, and consider claims before it is too late.

For more information and how we can help on R&D, please see


By Mark Webb, Chris Vigars and Stephen Dix, Enacta Growth Limited

The tax benefits of the 'patent box' tax regime are substantial – corporation tax on relevant profits for companies taxable at the main rate, of approximately 15% in 2013 down to 10% from 2017. However, how do you determine whether any technical innovations you make might qualify as inventions that are patentable?


To benefit from the patent box, certain criteria need to be met and will involve obtaining a UK or European patent that covers a technology which generates profit – this applies to any company including the property sector.

The assessment is necessarily technical. The criteria for patentability are the same in the UK and in Europe; the invention must:

  • be new
  • not be obvious
  • not be excluded from patentability.

There are exclusions for 'methods of doing business' and 'programs for computers'.

Fundamentally, if an invention provides a technical advance over what is already known (already known work is called the 'prior art'), it is not excluded from patentability. The technical advance can be almost anything. The invention must also not be obvious over the prior art; this is not much of a hurdle in many cases.

Beneficial research and development (R&D) tax reliefs for qualifying expenditure should also not be overlooked (also mentioned in this issue).

Existing patents

It may help to look at some existing patents to get a better idea of the sorts of invention which can be patented. Some patents are granted in areas which, on first sight, do not obviously qualify. What is important is the invention.

Building system

The Beattie Passive method of construction delivers Code 6 standard new homes quickly and at a lower cost, that offer energy and heat savings.

The passive method was invented as a way to address business issues at the onset of the recession; the costs and time of build, lack of credit, new building codes and lack of skilled staff.

Replacing gypsum with clay

Lehmorange identified that clay building boards are a simple, sustainable and practical alternative to gypsum plasterboards. The board combines the advantages of drywall construction for internal walls and ceilings, with the properties of clay as a natural low carbon building material.

Next steps

The above examples are fairly straightforward. There will be many more examples.

Therefore once you have decided that you may have patentable technology you should speak with a patent attorney for a view on how likely it is to be patented and to us to discuss tax benefits/possible R&D claims.

Determining the tax benefit from the patent box is not a simple exercise but the potential financial benefits can be significant. Now is the time to look at how your company may benefit.


By Martin Courtney and Manon Sel, Legacy Portfolio

While housebuilders were among the biggest winners in the March Budget, the property industry saw little else to write home about. Following the Mary Portas review and a new Government task force to tackle the decline in the high street, we have seen piecemeal progress in addressing the 14% of unoccupied high street shops (source: the Local Data Company). The burden of surplus property on UK plc continues to be a thorn in the side of many a corporate, with an estimated £10bn worth of surplus leasehold liabilities in existence in the UK. Preliminary research suggests that even successful businesses in stable economic times find themselves with 5-10% of their property portfolio no longer meeting their needs.

Surplus property is difficult to shift and putting up a 'For sale' or 'To let' sign may not be enough to solve the problem. New and innovative ideas to re-use and re-cycle property are being called for – and not necessarily in the most conventional ways!

Creative short-term solutions are increasingly prevalent and include projects such as Boxpark in Shoreditch. The newest idea in the fight for the declining high street can be found in a small patch of what was previously unused and undesirable land. Boxpark is the world's first pop-up mall based in the heart of east London and is entirely constructed of stripped and refitted shipping containers. This creates a low cost, and low-risk pop-up store offering to high street retail brands. Not only does it offer a unique shopping and dining experience, its offering to occupiers is unique as well, with leases in Boxpark typically lasting anywhere from 3 to 24 months.

Another example of an inspired use of vacant high street space can be found in the work of Central Working. Central Working aims to provide the ideal environment for growing businesses through a members-only workspace and club. Situated in a number of locations across London, they inhabit non-prime retail spaces and turn them into beautiful oases of high speed internet, good-quality coffee and stylish interiors, fostering collaborative working for start-ups and new businesses.

While short-term ideas appear to be popping up all over the place, it seems the long-term situations have been given less attention. Our approach at Legacy Portfolio is to provide just that – a long term and finite solution for corporates who are tied-in to leases that are surplus to their needs. Now more than ever, we are experiencing a step-change in corporates' attitudes towards their surplus property. This is, in part, due the impending lease accounting changes. These changes will indirectly affect how corporates choose to deal with their surplus property, simply because they will have to refocus on their operational properties. In partnership with Smith & Williamson, we have worked with FTSE 100 and NASDAQ firms such as Wolseley UK and Virgin Media, to rid them of the risks associated with their surplus lease portfolios. These portfolios often cost our clients upwards of £40,000 each day and present both financial and reputational risks.

With all this in mind, it is clear that there is a real need for change in the landlord/tenant relationship, as tenants will demand more and more flexibility going forward. With mortgages on commercial property frequently relying on significant lease terms, this presents a challenge for not just landlords but their funders too. The question that must therefore be asked is, whether landlords and their funders are currently doing enough to ensure that progress is being made?


By John Voyez

Despite The Times' report of property billionaires soaking up the sun on the Croisette in Cannes (never let the truth get in the way of a good story), MIPIM this year was cold and wet and it snowed! However, the chinking of beer bottles outside Caffe Roma was not to be dampened, and it is generally felt that there were slightly more people at MIPIM this year, and slightly more enthusiasm for the direction the property market appears to be slowly moving in, depending on which journalist you wish to follow.

It would seem that the capital markets are prepared to lend again, and sovereign wealth funds are showing interest, although much of the interest is focused on London with the rest of the country continuing to find life hard. The TMT (technology, media and telecoms) sector is also receiving a lot of attention which is creating interest around the Liverpool Street area and East London, Shoreditch and Kings Cross/midtown areas, but also with predictions of growth in university towns where there are bright innovative people living and working.

As for the residential market, which continues to receive a range of press reviews, there are concerns whether high end residential developments are just past their peak, with a degree of soul searching as to whether we should be converting all our commercial excess space into residential accommodation, and the economic impact of selling to absentee owners from the Far and Middle East. Outside London the commercial to residential debate is not an issue with low levels of demand.

All in all MIPIM yet again identified the trends within the property sector, and Boris Johnson promoted London in his very unique way. We continue to find the week rewarding from the point of view of meeting our clients and underlining that Smith & Williamson are serious about property, and building new contacts.

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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