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
General
- 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.
VAT
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