UK: Budget 2005 Business Summary

Last Updated: 23 March 2005
Article by Belinda Bridgen

The following is a summary of the most important aspects of the Budget affecting business taxation. As always, details at this stage are scant and we have to await publication of the draft legislation for the full facts.

Except where identified below there has been no change in the tax rates and thresholds for corporation tax, VAT, stamp duty, Stamp Duty Reserve Tax (SDRT) or Stamp Duty Land Tax (SDLT).

Property Tax

Stamp Duty Land Tax (SDLT)

First the good news – the threshold for SDLT on residential properties has doubled to £120,000.

That's it – the rest appears to be bad news:

  • disadvantaged areas relief for commercial land is abolished although it is retained for residential land
  • a number of anti-avoidance measures are introduced to stop certain schemes including:
    • extension of circumstances giving rise to clawback of group relief
    • restriction of acquisition relief to trades which do not comprise land transactions
    • imposition of tax on the grant of a lease to a nominee or bare trustee
    • all variations of leases where the tenant gives consideration are to be treated as the acquisition of a chargeable interest not just variations to reduce the rent
    • changes to the rules of contingent consideration to cover loans and deposits
    • ensuring that the sale element of a sale and leaseback is chargeable by reference to the full market value disregarding the effect of the lease back
    • restriction of sub-sale relief for certain refinancing arrangements for individuals.

All these changes take effect as of 17 March 2005. There are transitional provisions whereby certain transactions under contracts entered into, on, or before 16 March may continue to benefit from the old rules.

Furthermore, the disclosure rules for promoters or users of tax avoidance schemes, introduced last year, are to be extended to cover SDLT schemes relating to commercial property with a market value of at least £5 million, with effect from 1 July.

The Inland Revenue seems determined to collect its pound of flesh, or its 4%.

Real Estate Investment Trusts (REITs)

The Government has confirmed its commitment to introduce REITs and is aiming to introduce legislation in 2006, following further consultation with the industry. The objective is to create a flexible vehicle which gives the same tax consequences as direct investment i.e. there should not be an additional layer of tax but nor should there be any loss of tax to the Government.

The broad proposal is that the REIT should take the form of a closed-end company, where at least 75% of its activities comprise property investment. It need not necessarily be listed, need have no particular form of management structure and could invest in all forms of property both in the UK and elsewhere. The 75% test would permit other activity including development. However, single property investment would not be permitted – there must be a portfolio.

The tax regime suggested is total exemption for the property investment activity with any other activity or income being subject to normal corporation tax rules. This is subject to resolving the following issues on which industry views and suggestions are invited:

  • ensuring that non-residents pay the same level of tax as now (basic rate tax on rental income) having regard to obligations under double tax treaties
  • preventing excessive borrowing levels
  • how REITS could operate within a group structure.

Comments are invited by 27 May 2005.


  • The VAT registration threshold is increased to £60,000
  • The VAT avoidance scheme disclosure rules are to be extended to cover schemes which remove the effect of the "option to tax" with effect from a date to be announced which will be after Royal Assent
  • There is a package of measures affecting partial exemption designed to ensure "fair recovery of VAT". In other words, the rules are tightened and Customs get more power.

Capital Allowances

  • 100% capital allowances on renovating disused business premises in disadvantaged areas.

Alternative Property Finance

Changes will be introduced to facilitate Islamic lending. Such transactions will be taxed on the same basis as equivalent transactions involving the payment of interest. There will also be an extension to the range of SDLT reliefs available for such transactions.


There are a number of technical changes relating to chargeable gains arising to certain Unauthorised Unit Trusts (UUTs) and Open Ended Investment Companies (OEICs). Regulations to reform the tax treatment of Authorised Investment Funds (AIFs) and their investors will be introduced after further discussion with the industry.

Tax relief for low budget films, which was due to expire on 1 July 2005 is extended until 31 March 2006. However the anti-avoidance provisions announced in the December Pre-Budget Report came into effect on 2 December 2004.

Other Corporate Tax Proposals

There are anti-avoidance provisions to block a number of schemes, which have been disclosed under the disclosure rules introduced last year. These are principally in relation to schemes that use financial products, relate to intangible assets, create double tax relief and international arbitrage using hybrid entities or instruments ("double dipping").

There is clarification on the calculation of double tax relief on trade receipts and a number of proposals designed to cope with International Accounting Standards particularly in relation to financing arrangements, derivatives and securitisation vehicles.

This article is only intended as a general statement and no action should be taken in reliance on it without specific legal advice.

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