The Budget saw the Chancellor announce some welcome measures for the real estate sector, including reliefs and stimuli designed to encourage investment and construction activity by SMEs in particular. However, there was more bad news for non-residents and those holding UK property in enveloped structures.

Annual investment allowance

From April 2014, the annual investment allowance (AIA) increased significantly, giving businesses the opportunity to claim full tax deductions for the first £500,000 of capital investment expenditure qualifying for capital allowances. This policy is in line with the Government's stated objective of stimulating the current levels of capital investment by businesses, which remain stubbornly low compared to prerecession levels. It is particularly beneficial for small and medium-sized real estate businesses, which will have the opportunity to claim immediate tax relief for a significant portion of fit-out costs spent on commercial investment properties, as well as investment in machinery and equipment. The increase is, however, temporary and the AIA will revert back to £25,000 from 1 January 2016. This gives businesses only a small window of opportunity to take advantage of the enhanced relief. They will therefore need to act fast and consider accelerating or enhancing their existing capital investment plans to avoid missing out.

An undertaking by the Government to leave the AIA at £500,000 on a permanent basis, as part of a wider range of stimuli, would have been welcome. As it is, there is considerable uncertainty as to the future of the allowance beyond 2015 – although this is not altogether surprising given that the AIA has fluctuated significantly since its introduction in 2008.

'Enveloped' structures

The Government has built on measures introduced in 2013, designed to tax high-value residential property owned by a company, a partnership with a corporate member or other collective investment vehicle, by reducing its threshold. From 1 April 2015, 'enveloped' dwellings worth in excess of £1m will be brought into the regime and, from 1 April 2016, the threshold will be reduced further to £500,000.

Enveloped residential properties above this threshold may become subject to 15% stamp duty land tax (SDLT) (the £500k plus threshold applies for transactions on or after 20 March 2014 for SDLT purposes on acquisition), a sliding scale of annual charges and capital gains tax (CGT) at 28% on disposal. Fortunately, the measures continue to be subject to a wide range of reliefs covering almost all situations where property is held for genuine commercial purposes. However, where dwellings breach the threshold, there remains the added compliance burden of submitting annual returns to claim relief. A consultation is expected this summer on proposals to reduce the administrative burdens for those within ATED.

It remains to be seen whether the Government will introduce further measures against enveloped property given that, anecdotally, de-enveloping has not happened on a wide scale. It would be unsurprising, especially in the light of reports that the tax take for the existing measures was five times more than the Government projected. Indeed, inheritance tax (IHT) shelter, one of the principal remaining benefits of holding property in an enveloped structure, could be the Government's next angle of attack.

Further tinkering

In addition to these announcements, a long-awaited consultation document published shortly after the Budget contains proposals to bring all non-resident landlords within the scope of CGT. No formal legislation has been drafted yet, but it is likely that it will operate alongside, rather than replace, the existing CGT for enveloped properties. A withholding tax for property disposals by non-residents is also likely to be introduced to mitigate avoidance. The Help to Buy scheme has been extended for new-build homes until 2020. This, together with a £500m stimulus for small house building businesses, should further bolster construction activity.

The measures outlined above could be classed as tinkering by the Government. Helpful measures such as radical supply side reforms, wholesale changes to planning regulations, and a tax break for investment to drive the delivery of new homes were not in evidence. This raises the question: was Budget 2014 another wasted opportunity for the Government?

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