The Chancellor made various announcements on 6 March 2024 in his Budget impacting on the taxation of UK real estate. The following commentary is subject to the publication of the relevant draft legislation in the Finance Bill.
Stamp duty land tax (SDLT)
The Government will introduce legislation in the Spring Finance Bill 2024 to abolish Multiple Dwellings Relief (MDR), which applies where more than one dwelling is acquired, from 1 June 2024. Property transactions with contracts that were exchanged on or before 6 March 2024 will continue to benefit from the relief regardless of when they complete, as will any other purchases that are completed before 1 June 2024. This is subject to various exclusions, for example that there is no variation of the contract after that date.
It should be noted that SDLT applies only to transactions in property in England and Northern Ireland. MDR in Land & Buildings Transaction Tax and Land Transaction Tax, in respect of property in Scotland and Wales, respectively, currently remains in place and unchanged.
MDR provides for partial relief from SDLT where more than one dwelling is acquired, by calculating the SDLT due by reference to the average chargeable consideration provided for all the dwellings in a transaction (or linked transactions) and then multiplying the tax due by the number of dwellings. The relief provided under MDR is subject to a minimum rate of tax of 1%, or a minimum of 3% where the additional dwelling surcharge applies.
HMRC had issued a SDLT consultation in November 2021 in respect of mixed property and MDR, having identified these as being two areas of SDLT where “the current rules are leading to potentially unfair outcomes, incorrect claims, or abuse of the rules.” They advised that they had seen acquisitions claimed to be mixed-property transactions despite the acquisition not containing any meaningful non-residential aspects, and incorrect claims for MDR, in particular in relation to what are purported to be ‘annexes’ to single residential properties.
The responses to this consultation have now been published and, in relation to mixed-property purchases, the Government has decided not to take forward any changes to the SDLT rules. In relation to MDR, the Government has concluded that the relief is not meeting its original objectives of supporting investment in residential property and the private rental sector in a cost-effective way, hence its decision to abolish MDR.
Two other SDLT changes have also been announced at Spring Budget 2024, which will both take effect from 6 March 2024. Firstly, legislation will be introduced in Spring Finance Bill 2024 to amend out of date references and definitions in SDLT legislation relating to registered social landlords, and to remove public bodies from the SDLT 15% higher rate charge when purchasing residential property with a value of more than £500,000.
In addition, Spring Finance Bill 2024 amending the rules for claiming First-time Buyers’ Relief from SDLT in respect of leases and nominees. The changes will mean that individuals who purchase new leases using nominee or bare trust arrangements will be able to claim the relief. This measure appears to be aimed at victims of domestic abuse who wished to use such arrangements to prevent former partners from finding their new address were unable to claim relief.
Capital Allowances - extending full expensing to leased assets
Full expensing currently applies as a corporation tax relief specifically focused on companies investing in plant and machinery, attracting first year allowances at either 100% or 50% of qualifying expenditure. There has been a long standing exclusion from this relief in respect of assets provided for 'leasing' (the definition of which is broadly drafted), albeit property landlords have to date been able to claim full expensing in relation to a specific category of assets deemed ‘background plant and machinery’. The definition of background plant and machinery varies depending on the specific property type. However in most instances it should include the majority of ‘fixed’ plant and machinery (e.g. lighting, ventilation, electrical power systems).
Full expensing claims have so far been restricted on any leased non-background plant and machinery. This could include any ‘loose’ plant and machinery such as furniture, which is more prevalent in some real estate asset classes than others (e.g. hotels).
The government will shortly publish draft legislation for technical consultation to help it consider how the full expensing rules might be extended to allow lessors (potentially including landlords) to claim the relief on currently restricted assets in certain cases. This extension will be a welcome move for companies currently unable to benefit from full expensing relief on the whole amount of their plant and machinery capital expenditure.
It is not yet clear as to the extent and timing of when the extended relief will apply. The announcement made as part of Spring Budget 2024 made clear that the changes would be made “when fiscal conditions allow” - we await further details in the draft legislation.
Reserved Investor Funds (‘RIFs’)
The government will introduce legislation in Spring Finance Bill 2024 in relation to the Reserved Investor Fund (Contractual Scheme) (“RIF”). This will include providing for powers to make detailed tax rules through secondary legislation at a later date. The measures will take effect from a date to be determined in a statutory instrument to- be laid at a later date.
The proposals follow a consultation on the scope and design of a tax regime for a RIF published in April 2023, the response to which was published at Spring Budget 2024.
The RIF is designed to complement and enhance the UK’s existing funds regime, by providing a UK based unauthorised contractual scheme with lower costs and more flexibility than the existing authorised contractual scheme regime. The intention is for the tax treatment of the RIF to be non-distortive and tax neutral, such that an investor investing through a RIF will be in a similar tax position to if they had invested in the underlying assets of the funds directly. Where possible, the tax rules will replicate the existing tax rules applying to Co-ownership Authorised Contractual Schemes (“CoACs”).
In the summary of the responses to the consultation, the government has confirmed that it will proceed with all three of the alternatives for “restricted” RIFs described in the consultation:
- where at at least 75% of the value of the RIFs assets is derived from UK property (so the RIF is “UK property rich”, for the purposes of the non-resident capital gains rules); or
- where all investors in the RIF are exempt from tax on gains; or
- where the RIF does not directly invest in UK property, or in UK property rich companies.
In designing these proposals for restricted RIFs, the government will be taking appropriate steps to address all risks of the regime failing to align with the government’s policy of taxing non-UK resident investors on gains on direct or certain indirect disposals of UK property.
The government has decided not to proceed with the option of an “unrestricted” RIF at this time, following stakeholders’ concerns that this option would be operationally complex and likely to be unattractive to most investors given the necessity to address the aforementioned tax risks.
A number of detailed technical points were discussed in the consultation and further issues raised in the responses, a number of which the government has acknowledged and will address. Other concerns, particularly in relation to the consequences where the conditions related to a restricted RIF are breached, albeit temporarily, are not addressed in detail. However, the government has committed to work with stakeholders through the consultation process to address these concerns.
Freeports and Investment Zones
The tax reliefs available in Freeport tax sites are being extended from five to ten years, until September 2031 in England, and September 2034 in Scotland and Wales.
In respect of Investment Zones, the government has announced further details on Investment Zones in Greater Manchester, Liverpool City Region, North East of England, South Yorkshire, West Midlands and West Yorkshire. The government has also confirmed that the Tees Valley Investment Zone will focus on the digital and creative sectors. Further details on the Tees Valley and East Midlands Investment Zones will be announced shortly.
In addition, Investment Zones will be extended from five to ten years in Scotland and Wales, matching the extension announced for England at Autumn Statement 2023. Full details of the four Investment Zones in Scotland and Wales, and details on the Northern Ireland Enhanced Investment Zone, will be announced later this year.
Freeports and Investment Zones, introduced in 2021 and 2022 respectively, mean that designated sites benefit from a number of tax reliefs, including Stamp Duty Land Tax (‘SDLT’) relief, enhanced capital allowances for plant and machinery, enhanced structures and buildings allowances, and secondary Class 1 National Insurance contributions (‘NICs’) relief.
Annual Tax on Enveloped Dwellings (‘ATED’)
The annual ATED charges are expected to increase in line with inflation as in previous years. An annual tax on enveloped dwellings is charged on the acquisition and holding of high-value residential properties (property over £500,000) through a company or other 'non-natural' person.
Business Rates
New rates relief is to be introduced for Film Studios from 1 April 2024, with up to 40% relief available. However, the amount available may be limited by Subsidy Rules, depending on how the relief is delivered by the Local Authority. The details of how the relief will operate are still to be provided.
Changes to the qualification criteria for empty rates relief, the reset period has been increased from 6 weeks to 13 weeks. This means a property must have been occupied for at least 13 weeks before any new period of 3/6 month empty relief applies.
The Government will launch a consultation on introducing a General Anti Avoidance Rule for business rates. This will concentrate primarily on empty rates avoidance and measures to tackle so-called ‘Rogue Agents’.
Capital Gains Tax (“CGT”) rate on residential property disposals
The higher rate of CGT for residential property disposals payable by individuals and certain trusts will be cut from 28% to 24% with effect from 6 April 2024. For individuals, the lower rate will remain at 18% for any gains that fall within the basic rate band. The government says that this measure will support the housing market as it “will encourage landlords and second home-owners to sell their properties, making more available for a variety of buyers including those looking to get on the housing ladder for the first time, while also raising revenue over the forecast period”.
Furnished holiday lettings
The government has announced that it will abolish the Furnished Holiday Lettings tax regime with effect from April 2025, with some anti-forestalling provisions applying from 6 March 2024. The stated intention is to “level the playing field between short- term and long-term lets and support people to live in their local area.”
If you would like to discuss any of these areas further, please get in touch with your usual PwC Real Estate Tax contact.
